2025 (12) TMI 1248 - AT - Service Tax

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 ... Taxability - discrepancy between returns filed under the Finance Act, 1994 and under Income Tax Act, 1961 respectively - no evidence of any taxable service having been undertaken - HELD THAT:- The levy of tax, on ‘taxable service’ at the rate prescribed in section 66B of Finance Act, 1994 applied to the value determined in accordance with section 67 of Finance Act, 1994, is subject to exception for not being service in section 65B(44) of Finance Act, 1994, exclusion by enumeration in section 66D of Finance Act, 1994 and exemption in notifications under section 83 of Finance Act, 1994. While it could be posited that exclusion and exception could be allowed only upon evidence of eligibility furnished by assessee, it is not in doubt that invoking of section 73 of Finance Act, 1994 is legal and proper only upon income being established as consideration to constitute ‘service’ as set out in section 65B (44) of Finance Act, 1994. Impliedly, every receipt is not deemed to be ‘consideration for service’ to be remitted by assessee as excluded or exempted from tax and income for the purpose of levy under another statute is not consideration either. The authority invoking section 73 of Finance Act, 1994 must, by investigation including response from assessee, must arrive at reasonable certainty of liability on grounds set out in the notice before determination of recoverable tax even if by failure on the part of the noticee to furnish evidence in support of claim proposed to be disallowed. It would appear that the initiation of recovery proceedings under section 73 of Finance Act, 1994 solely on the basis of information received from third parties was so rampant and undesirable that the Central Board of Indirect Taxes & Customs (CBIC), vide circular dated 26th October 2021, instructed that 'It is once again reiterated that instructions of the Board to issue show cause notices based on the difference in ITR-TDS data and service tax returns only after proper verification of facts, may be followed diligently. Pr. Chief Commissioner /Chief Commissioner (s) may devise a suitable mechanism to monitor and prevent issue of indiscriminate show cause notices. Needless to mention that in all such cases where the notices have already been issued, adjudicating authorities are expected to pass a judicious order after proper appreciation of facts and submission of the noticee.' Thus, the lack of allegation in the show cause notice, that any, or even part, of the impugned income was not attributable to any of the claimed activities, places the invoking of section 73 of Finance Act, 1994 in jeopardy at the threshold itself. It would appear that the adjudicating authority was influenced almost entirely by the additional income reported in returns prescribed in another jurisdiction. The impugned order is set aside - appeal allowed. 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.