Service tax demand based on ITR/Form26AS entries requires independent verification of services and receipts; demand set aside.

Service tax demands premised solely on ITR/Form 26AS entries are impermissible without independent verification that services were rendered and consideration received. A show cause notice must specify the precise service and factual basis for the demand; mere ITR declaration absent invoices or contemporaneous records is insufficient. Bank statements and contemporaneous records are proper evidence to assess actual receipts, and authorities are directed to reconcile ITR TDS data before issuing notices. Penalties are recognised as statutory consequences where tax liability is duly established, but the impugned demand lacking merit is set aside and the appeal allowed.

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Issues: (i) Whether a service tax demand confirmed solely on the basis of ITR/26AS/TDS data without a determination of the nature of receipts and without proper verification is sustainable; (ii) Whether penalties imposed under Section 78 and various sub-sections of Section 77 are sustainable.

Issue (i): Whether a service tax demand based on ITR/26AS/TDS data without independent determination of the nature of receipts and without proper verification can be confirmed.

Analysis: The Tribunal examined the departmental reliance on Form 26AS/ITR and noted the absence of any finding as to the actual nature of services or receipts. It referred to Board instructions requiring reconciliation of ITR-TDS data and observed that demand cannot be issued indiscriminately on the basis of third-party data. The Tribunal considered bank statements showing receipts much lower than declared ITR turnover and held that the difference could be subject to investigation by appropriate authorities but cannot alone sustain a service tax demand. The Tribunal also relied on authorities emphasising that a show cause notice must communicate specific allegations and the basis for tax demand so that the assessee can meet the case.

Conclusion: The service tax demand confirmed solely on the basis of ITR/26AS/TDS data without determination of the nature of receipts and without proper verification is not sustainable; the impugned demand is set aside in favour of the assessee.

Issue (ii): Whether penalties under Section 78 and under various sub-sections of Section 77 are sustainable.

Analysis: The Tribunal accepted that penalty under Section 78 is a statutory penalty tied to tax liability and therefore could not be wholly set aside on that ground. However, it found that penalties under various sub-sections of Section 77 were imposed without adequate basis given the defective demand confirmation and absence of proper inquiry, and therefore were not warranted.

Conclusion: Penalty under Section 78 is not interfered with and stands; penalties under Section 77 are set aside in favour of the assessee.

Final Conclusion: The appeal is allowed; the impugned order confirming the service tax demand is set aside for lack of proper verification and particulars, and certain penalties under Section 77 are quashed while the statutory penalty under Section 78 is upheld.

Ratio Decidendi: A service tax demand cannot be sustained merely by reliance on ITR/26AS/TDS data without a prior determination of the nature and receipt of taxable services and without furnishing specific allegations in the show cause notice; reconciliation and verification are necessary before issuing a demand.

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