Extended period of limitation in service tax demands: bona fide belief and departmental inaction bar invocation, demand set aside

Extended period of limitation for service tax demands cannot be invoked where the taxpayer entertained a bona fide belief in exemption and the department had actual knowledge of the facts but failed to act; this legal position negates application of extended limitation and results in annulment of the demand. The presence of record evidence of surrender of registration and pending departmental action, together with no proven suppression, fraud, collusion, or wilful misstatement by the taxpayer, establishes that invocation of extended limitation is unjustified and the demand must be set aside.

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Issues: Whether the demand of service tax for Financial Year 2014-15, raised by invoking the extended period of limitation under Section 73(1) of the Finance Act, 1994, is sustainable.

Analysis: The legal framework includes Section 73(1) read with its proviso permitting an extended period only where non-payment or short payment results from fraud, collusion, wilful misstatement, suppression of facts, or contravention of law with intent to evade tax. Authorities cited establish that mere non-payment or negligence does not attract the proviso; specific and positive conduct indicating mala fide or suppression must be alleged in the show cause notice so the assessee can meet the case. The record shows that the department had knowledge of the nature of services and that the appellant entertained a bona fide belief about taxability based on earlier exemptions and related factual circumstances. The appellant did not place cogent evidence on record to displace the presumption of bona fide belief, but crucially the show cause notice and adjudication invoked the extended period without specific findings or explicit averments demonstrating fraud, collusion, wilful misstatement or deliberate suppression with intent to evade tax. Precedents require clear allegations and proof of such positive conduct before invoking the extended limitation; absent such specific averments and proof, invocation is impermissible. Applying these principles to the facts, the demand premised on the extended period is time-barred.

Conclusion: In favour of the assessee. The invocation of the extended period of limitation under Section 73(1) of the Finance Act, 1994 is not sustainable; the demand is time-barred and the impugned order is set aside.

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