Service tax demand based only on mismatch between returns and income was quashed for lack of proof receipts were service consideration.

Demand under s.73 of the Finance Act, 1994 based solely on discrepancies between service tax returns and income reported under the Income Tax Act was held unsustainable absent any evidence that the receipts constituted "consideration" for a "service" within s.65B(44) read with valuation under s.67 and charge under s.66B. The Tribunal held that not every receipt or income under another statute is deemed consideration for taxable service, and the department must, through investigation and assessee response, reach reasonable certainty of service tax liability on the grounds pleaded. As the show cause notice lacked specific allegations linking any part of the impugned income to taxable services, the invocation of s.73 failed at the threshold; the impugned order was set aside and the appeal allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether a demand under section 73 of the Finance Act, 1994 can be sustained when the show cause notice proceeds only on the basis of a discrepancy between income reported under the Income-tax law and the taxable value declared in service tax returns, without identifying any specific taxable activity or establishing that the receipts constitute "consideration" for a "service" under section 65B(44) chargeable under section 66B.

(ii) Whether the absence in the show cause notice of any allegation that the impugned receipts (or any part thereof) were not attributable to the assessee's claimed non-taxable/excluded/exempt heads renders the initiation of proceedings under section 73 legally untenable at the threshold.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Sustainability of section 73 demand founded only on income-tax/service-tax mismatch without identifying taxable service

Legal framework (as discussed by the Court): The Court noted that service tax under section 66B applies to "taxable service" valued under section 67, subject to (a) exception for not being "service" within section 65B(44), (b) exclusion by enumeration (negative list) under section 66D, and (c) exemptions under notifications. The Court held that invocation of section 73 is "legal and proper only upon income being established as consideration" for "any activity carried out by a person for another" so as to constitute "service" within section 65B(44).

Interpretation and reasoning: The Court reasoned that every receipt is not deemed to be "consideration for service" and that "income for the purpose of levy under another statute is not consideration either." It held that the authority invoking section 73 must, by investigation (including considering the assessee's response), reach "reasonable certainty of liability on grounds set out in the notice" before determining recoverable tax. A mere reiteration that higher income is reported under the Income-tax law does not discharge this obligation, particularly where there is not even a "least cursory attempt" to investigate the assessee's activity and the nature of receipts. The Court found that the impugned proceedings proceeded on a presumption that differential income necessarily represented taxable service consideration, which is impermissible in the absence of identification of the taxable activity and establishment of chargeability.

Conclusions: A show cause notice and demand under section 73 cannot be sustained where it is founded solely on mismatch of figures between income-tax disclosures and service tax returns, without establishing-through allegations and investigation-that the receipts are consideration for an identified taxable service within section 65B(44) read with section 66B.

Issue (ii): Effect of absence of specific allegations in the show cause notice regarding non-attribution to claimed activities

Legal framework (as discussed by the Court): The Court emphasised that the threshold requirement for section 73 action is establishment that the impugned receipts are consideration for a service. While the Court acknowledged that exclusions/exemptions may require evidence from the assessee, it held that this does not displace the primary obligation of the tax authority to frame the charge on an identified taxable activity and grounds set out in the notice. The Court also treated the Board's instruction (as extracted in the judgment) as reinforcing that indiscriminate notices based only on ITR/TDS differences should not issue without proper verification and reconciliation.

Interpretation and reasoning: The Court recorded that the assessee had provided a reconciliation attributing the differential receipts to consultation fees, conventions, reimbursements towards conference participation outside India, and author royalty. The Court held that despite such response, the proceedings suffered from a foundational defect: the show cause notice lacked any allegation that any, or even part, of the impugned income was not attributable to the claimed activities. This omission placed the very invocation of section 73 "in jeopardy at the threshold itself." The Court found that the adjudicating authority was influenced "almost entirely" by additional income reported in income-tax returns, rather than by an examination of taxable activity and consideration. On this basis, the Court concluded that the proceedings could not stand.

Conclusions: Where the show cause notice does not contain specific allegations identifying the taxable activity or asserting that the impugned receipts (in whole or part) are not attributable to the assessee's claimed non-taxable/exempt heads, the initiation and confirmation of demand under section 73 is unsustainable; the impugned order is liable to be set aside and the appeal allowed.

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