Service Tax demand on rental income quashed as extended limitation under Section 73 proviso held inapplicable, time-barred

CESTAT Chennai allowed the appeal, setting aside the demand of short-paid Service Tax, interest and penalties on rental income and associated charges. The Tribunal held that invocation of the extended period under the proviso to the limitation provision was unsustainable, as the Department was aware since 2009 of the assessee's payment and non-payment particulars, evidenced by tax payments with interest and correspondence referencing the HC ruling in Home Solutions. In absence of fraud, collusion, wilful misstatement or suppression of facts, the SCN dated 25.05.2011 was held time-barred, rendering the impugned order legally unsustainable.

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1. ISSUES PRESENTED AND CONSIDERED

(1) Whether the invocation of the extended period of limitation for demand of service tax on renting of immovable property service was legally sustainable on the facts and circumstances of the case.

(2) Consequent upon the finding on limitation, whether the impugned demand of service tax with interest and penalty could be sustained in law.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (1): Legality of invoking the extended period of limitation

Interpretation and reasoning: The Court noted that the period of dispute was from 2007-08 to 2010-11 (up to September 2010), while the show cause notice was issued on 25.05.2011. It found that, as early as 2009, the Department was aware of the facts relating to payment, non-payment and short payment of service tax by the assessee, including through internal audit conducted in October 2009 and through correspondence between the assessee and departmental authorities concerning the levy of service tax on renting of immovable property service in light of the Delhi High Court decision in "Home Solutions". The Court held that this contemporaneous correspondence showed that the Department had been "kept in the loop" regarding the assessee's stand and the factual position, and that if at all the Department intended to raise a demand, it should have issued a show cause notice at that time. In the absence of any material establishing fraud, wilful misstatement, suppression of facts or similar conduct on the part of the assessee, the preconditions for invoking the extended period of limitation were held not to be satisfied.

Conclusions: The Court concluded that the show cause notice dated 25.05.2011 was barred by limitation and that the extended period of limitation could not be invoked in the facts of the case.

Issue (2): Sustainability of the demand of service tax, interest and penalty

Interpretation and reasoning: Having held that the show cause notice itself was time-barred and that the extended period was wrongly invoked, the Court held that the substantive demand of service tax, along with interest and penalty, which had been confirmed by the lower authorities, could not be sustained. In view of the finding on limitation, the Court considered it unnecessary to go into the further arguments on the merits, including the assessee's contentions regarding deduction of various taxes from the taxable value and the applicability of section 73(3).

Conclusions: The Court set aside the impugned order which had upheld the demand, and allowed the appeal on the ground of limitation, with consequential reliefs as per law.

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