2026 (3) TMI 202 - HC - Service Tax

Service tax demand based on income tax returns: set aside and remitted for fresh adjudication; attachments to be withdrawn.

Where a service tax demand was founded solely on income tax return disclosures, the court directed that Orders in Original be set aside and the matters ... Reconsideration of service tax demands raised on income-tax return inputs - application of observations recorded in earlier remand order - negative list doctrine - Withdrawal of bank attachment - Validity of the Orders-in-Original at Annexures-A, B and C, contending that the orders are passed raising demand of service tax solely on the basis of inputs received from the Central Board of Direct Taxes, whereby the records relating to income tax returns are stated to have indicated sales/gross receipts from services. Reconsideration of service tax demands raised on income-tax return inputs - application of observations recorded in earlier remand order - HELD THAT: - The Court found that the impugned Orders in Original had raised demand of service tax solely relying upon inputs from income tax return declarations (noted in the adjudication orders). Having regard to the order passed in W.P. No. 11154/2023 and connected petitions, the Court directed that the matters be reconsidered from the stage of reply to the show cause notice and that the designated officers take into account the observations extracted from that earlier order (including the specific queries recorded at para 10 concerning qualification under the statutory definition, applicability of the negative list and exemptions, applicability of notifications and rules, and limitation). All contentions on the merits and on jurisdiction are kept open and petitioners are at liberty to file fresh replies within a reasonable time fixed by the authorities. The note that some appeals were dismissed for non compliance with pre deposit requirements does not preclude reconsideration; the adjudication itself requires fresh consideration in light of the directions. [Paras 5, 6, 7, 9] Orders in Original set aside and remitted to the stage of reply to the show cause notice for fresh consideration, with instructions to apply the observations recorded in the earlier remand order; all substantive contentions left open. Withdrawal of bank attachment - HELD THAT: - The Court took cognisance that the Orders in Original were set aside and remitted for fresh consideration, and accordingly held that any bank attachment effected pursuant to those orders must cease to have effect. The respondent authorities were directed, upon receipt of certified copies of this order, to immediately issue instructions withdrawing the debit freeze/attachment with respect to the specified bank accounts. [Paras 11] Bank attachment to cease; respondent authorities to issue immediate instructions withdrawing the debit freeze upon receipt of certified copies. Final Conclusion: The Orders in Original are set aside and the matters remitted to the adjudicating authorities for reconsideration from the stage of reply to the show cause notices, with directions to apply the observations in the earlier remand order; petitioners may file fresh replies and the bank attachments effected pursuant to the impugned orders are to be withdrawn. Issues: (i) Whether the Orders in Original raising service tax demand based solely on information from income tax returns should be set aside and the matters remitted to the stage of reply to the show cause notice for fresh consideration; (ii) Whether bank attachment/debit freeze effected pursuant to the impugned orders should cease to have effect.Issue (i): Whether the Orders in Original based on income tax return inputs must be set aside and the matters relegated to the stage of reply to the show cause notice for fresh adjudication in accordance with specified considerations.Analysis: The orders of adjudication under challenge record that demand for service tax was raised on the basis of declarations in income tax returns. Reference is made to prior writ proceedings disposing similar challenges by remitting matters to the stage of reply to the show cause notice with directions to consider specified questions including applicability of Section 65B(44) of the Finance Act, 1994, whether services fall under the negative list, applicability of Notification No.25/2012 ST dated 28.06.2012 or other exemptions, liability under the relevant rule read with applicable notifications, and limitation. The orders in appeal are procedural dismissals for non compliance of pre deposit and do not foreclose reconsideration of the adjudication on merits once the Orders in Original are set aside and matter remitted. Petitioners are permitted to file fresh replies and the authorities are directed to reconsider from the show cause notice stage keeping the specified considerations in mind; all contentions are kept open.Conclusion: Orders in Original are set aside and the matters are remitted to the stage of reply to the show cause notice for fresh consideration in light of the specified observations, with all contentions kept open.Issue (ii): Whether bank attachment/debit freeze effected pursuant to the impugned Orders in Original must be withdrawn following setting aside of those orders.Analysis: The impugned Orders in Original have been set aside and the matters remitted for fresh adjudication; consequentially, attachments or debit freezes effected under those orders are no longer sustainable. The authorities are directed to issue instructions withdrawing the debit freeze/attachment in respect of the specified bank accounts upon receipt of certified copies.Conclusion: Bank attachment/debit freeze effected pursuant to the impugned Orders in Original shall cease to have effect and the respondent authorities shall issue immediate instructions to withdraw such attachments upon receipt of certified copies.Final Conclusion: The Orders in Original are set aside and the matters are remitted to the adjudicating authorities to be reconsidered from the stage of reply to the show cause notice in accordance with the observations specified; consequential attachments are to be withdrawn and petitioners are permitted to file fresh replies and pursue further remedies if aggrieved.Ratio Decidendi: Where a service tax demand is founded solely on information from income tax returns, the proper course is to set aside the Orders in Original and remit the matter to the stage of reply to the show cause notice for fresh adjudication, requiring the authorities to examine applicability of Section 65B(44) of the Finance Act, 1994, negative list and exemption notifications (including Notification No.25/2012 ST dated 28.06.2012), liability under the relevant rule read with notifications, and limitation, with all contentions left open.