Service Tax Demand Based Solely on ITR & 26AS Quashed by CESTAT Allahabad

Santosh Pal Contractor Vs Commissioner of Central Excise & CGST (CESTAT Allahabad)

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Allahabad Bench, in the case of Santosh Pal Contractor Vs Commissioner of Central Excise & CGST, ruled that a Service Tax demand cannot be sustained when it is based solely on data from the Income Tax Return (ITR) and Form 26AS without independent verification and finding that the entire reported income was exclusively for the provision of taxable services. Consequently, CESTAT quashed the Service Tax demand, primarily on the ground of limitation.

Key Issue and Facts

The Service Tax Department initiated proceedings against Santosh Pal Contractor (the Appellant) for the financial year 2016-17, alleging he was providing taxable services without registration or payment of Service Tax. The department’s case was built on information from the Income Tax Department (TDS data in Form 26AS and figures from the Profit & Loss Account in the ITR), which showed gross receipts of over crores.

The initial Show Cause Notice (SCN) proposed a demand of based on the amount reflected in the Profit & Loss Account, adjusted downwards to based on an inquiry revealing payments from a Nagar Panchayat for the construction of a guest house.

The Adjudicating Authority confirmed the full demand and imposed penalties. On appeal, the Commissioner (Appeals) reduced the tax demand to by:

1. Denying the full exemption under Entry 12A of Notification No. 25/2012-ST (as amended) because the contract for the guest house construction was signed after the cut-off date of March 1, 2015.

2. Allowing an abatement of 60% under Rule 2A(i)(A) of the Service Tax (Determination of Value) Rules, 2006, classifying the work as a Works Contract Service.

3. Upholding the invocation of the extended period of limitation under Section 78, confirming the penalty for suppression of facts, lack of registration, and non-filing of returns.

The Appellant challenged the proceedings before CESTAT, arguing that the entire demand was unsustainable, citing complete exemption under the Mega Exemption Notification for services rendered to State Authorities (including the Nagar Panchayat) and asserting that the department failed to demonstrate that the amounts in the ITR/Form 26AS were actually received for taxable services.

CESTAT’s Holding

CESTAT allowed the appeal, setting aside the demand confirmed by the Commissioner (Appeals). The tribunal’s decision was primarily grounded in the lack of independent evidence and the resultant failure to justify the extended period of limitation.

Demand Based Solely on ITR/Form 26AS is Unsustainable

The Tribunal critically examined the foundation of the revenue’s case:

• CESTAT found that the entire demand was “built up merely on the basis of figures shown in the ITR and Form 26AS statement.”
• It noted that Form 26AS is prepared by the Income Tax Department, not the taxpayer, and may contain errors. The department failed to investigate the discrepancy between the Form 26AS figures and the Profit & Loss Account turnover.
• Crucially, CESTAT held that the department’s role is not merely to “copy – past[e] figures retrieved from ITR & Form 26AS” but to “judiciously ascertain as to whether the said amount is actually received for provision of service.” The Commissioner (Appeals) failed to make any finding to demonstrate that the income reflected was indeed chargeable to Service Tax.

Precedent on Sole Reliance of Income Tax Data

CESTAT referred to existing judicial precedents, holding that reliance solely on income tax documents is an insufficient basis for confirming a tax demand:

• M/s Firm Foundation and Housing Pvt. Ltd. vs. Principal Commissioner of Service Tax, Chennai (Madras High Court): This decision was referenced to support the view that the revenue’s reliance upon Profit & Loss Accounts is irrelevant for the purpose of confirming Service Tax.
• M/s Sigma Trade Wings vs. Commissioner of Central Excise, Lucknow (CESTAT Final Order): This precedent reinforced the view that demands based solely on Profit & Loss Accounts read with Form 26AS are not proper.

Limitation

Since the revenue’s entire case for demanding tax by invoking the longer period of limitation was based on these unverified ITR and Form 26AS figures, which CESTAT found to be an improper basis, the Tribunal concluded that the invocation of the extended period was unsustainable. The impugned order was set aside on the grounds of limitation itself.

FULL TEXT OF THE CESTAT ALLAHABAD ORDER

The present appeal has been filed by the Appellant assailing the Order-in-Appeal No.447/ST/ALLD/2022 dated 22.09.2022 passed by Commissioner (Appeals) Customs, CGST & Central Excise, Allahabad.

2. Briefly stated, the facts of the case are that on the basis of
information received by the Service Tax Department of value of services declared by the Appellant in ITR and TDS data (Amount paid to the party by various parties and TDS by such payers as reflected in Form-26AS under Section 194C, 194H, 194I & 194J of Income Tax Act, 1961), obtained from the Income Tax Department for the financial year 2016-17, it appeared to the Department that the Appellant is engaged in providing taxable services under Finance Act, 1994¹ to its clients. It was also observed that the Appellant was not registered under Service Tax for providing taxable services during the relevant period. The gross receipts received by the Appellant during the period under dispute is Rs.18,53,77,658/-, the Appellant was registered under Section 22 of CGST Act, 2017 but did not get registered under the existing law. The amount of Rs.18,07,27,506/- was reflecting in the Profit & Loss Account. On enquiry by the Department with the Executive Officer of Nagar Panchayat Hariharpur, Sant Kabir Nagar. A reply dated 23.09.2021 was received which mentioned that the Appellant had provided the services to Nagar Panchayat, Hariharpur for construction of ATITHI BHAWAN in Indira Nagar for Public Welfare amounting to Rs.1,39,49,702/- and the rest amount has been used for construction of Roads and Ditch. Total amount paid by the Nagar Panchayat was Rs.16,66,13,836/-. Show Cause Notice² dated 18.10.2021 was issued proposing to demand Service Tax amounting to Rs.20,92,455/- and to impose penalties under various Sections of the Act as amended, on the basis of following calculation as shown in the table below:-

3. The Adjudicating Authority vide the Order-in-Original dated 21.03.2022 confirmed the demand as proposed in the SCN alongwith applicable interest and imposed penalty of equal amount under Section 78 of the Finance Act, 1994 and imposed penalty of Rs.10,000/- under Section 77(1) of the Act and imposed late fine of Rs.40,000/- in terms of Rule 7C of Service Tax Rules read with Section 70 of the Act. Being aggrieved, the Appellant filed appeal before the first Appellate Authority and the learned Commissioner (Appeals) observed as under:-

“4.1 The Appellant has contested that they have provided services to Nagar Panchayat, Hariharpur for construction of guest house at Indiranagar which is exempted under Entry No.12A of the Notification No.25/2012-ST dated 20.06.2012. I observe that during the relevant period i.e. F.Y. 2016-17, the entry No.12A of the mega exemption Notification No.25/2012-ST dated 20.06.2012 provide as under:

“12A. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of-

a. a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

b. a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or

c. a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause (44) of section 65 B of the said Act;

under a contract which had been entered into prior to the 1^st March, 2015 and on which appropriate stamp duty, where applicable, had been paid prior to such date; provided that nothing contained in this entry shall apply on or after the 1^st April, 2020.”[Inserted vide Notification 9/2016-Service Tax to be in effect from 1^st March, 2016].

4.2 In the instant case it is admitted fact that tender was finalized on 28.02.2015 and contract was made on 24.03.2015. Thus, it is evident that contract was signed after 1^st March 2015, therefore, the services rendered by the appellant are not covered under entry No.12A of the mega exemption notification No.25/2012-ST dated 20.06.2012. Therefore, the appellant is liable to pay service tax on the consideration received for construction of said guest house at Indiranagar.

4.3 The appellant has also contested that they are eligible for abatement of 70% on the gross value for construction activities performed by them. On perusal of bills produced by the appellant, I observe that the appellant has rendered constructed guest house along with materials, therefore, service rendered by them comes under works contract services. Since, the construction activities performed by the appellant comes under original work, therefore, the appellant is eligible for abatement of 60% on the gross value in terms of Rule 2A(i)(A) of the Service Tax (Determination of Value) Rules, 2006.

4.4 In view of above, the service tax liability on the appellant is as under:

Thus, the appellant is liable to pay service tax amounting to Rs.8,36,982/- along with interest.

4.5 I observe that under the self-assessment procedure specified in the statute, the appellant was required to assess & pay their Service Tax liability correctly, on their own. The appellant has neither taken service tax registration nor filed ST-3 returns. The evasion of Service Tax could be detected only during the course of enquiry conducted by the Department. Thus, it is a clear case of suppression of facts and contravention of the statutory provisions, with intent to evade payment of Service Tax. Thus, I find that extended period of limitation has been rightly invoked in this case and appellant is liable for penalty of Rs.8,36,982/ under Section 78 of the Act.

4.6 I also observe that the appellant has failed to take service tax registration, therefore, penalty of Rs.10,000/-imposed under Section 77(1)(a) of the Act is justified. However, late fee of Rs.40,000/- for non filing of ST-3 return for the period April’2016 to March’2017 is not justified in view of judgement of the Hon’ble Tribunal in the case of Jossy Edwin Pinto v. Commr. Of C. Ex & Central Tax, Manglore, reported in 2019 (27) G.S.T.L. 575 (Tri-Bang.). The Hon’ble Tribunal in this case held as under-

“Penalty under Rule 7C of the Service Tax Rules, 1944 – Non-filing of returns – Sustainability – Said rule applicable only in case of delay in filing returns Since instant case is of filing no return at all, said rule not applicable – Penalty set aside Section 70 of the Finance Act, 1994. [paras 6,7]” 4.6.1 However, since the appellant has not filed ST-3 returns during the F.Y. 2016-17, therefore, I impose penalty of Rs.10,000/- on the appellant under Section 77(2) of the Act for violation of Section 70 of the Act.

5. In view of the above, I modify the impugned Order dated 21.03.2022, as under:

i. Confirmation of demand of Service Tax (including Cesses) is reduced to Rs.8,36,982/- along with interest;

ii. Penalty imposed upon the appellant, under Section 78 of the Act, is reduced to Rs.8,36,982/-;

iii. Penalty of Rs.10,000/- under Section 77(1)(a) return shall remain unchanged.

iv. Impose penalty of Rs.10,000/- under Section 77(2) of the Act.

v. Late fee of Rs.40,000/- for non filing of ST-3 returns is set aside.”

Hence the present appeal before the Tribunal.

4. The learned Advocate appearing on behalf of the Appellant submitted that the learned Commissioner (Appeals) was pleased to allow the abatement to the tune of 60% on the gross value for construction activities as, upon perusal of the relevant bills produced by the Appellant, it was observed by the learned Commissioner (Appeals) that the Appellant had constructed a guest house alongwith materials and therefore the services rendered by it shall be classified as Works Contract Services. Thus, the learned Commissioner (Appeals) held that the Appellant was entitled to an abatement of 60% on the gross value in terms of Rule 2(i)(A) of the Service Tax (Determination of Value) Rules, 2006. The demand confirmed upon the Appellant was accordingly reduced to INR 8,36,982/- for the relevant period. He further submitted that the proceedings, in the present case, had commenced for the first time only on 16.04.2021 under the provisions of Finance Act, 1994, concerning Service Tax liability governed by the Finance Act, 1994 which stood repealed much prior to that date and accordingly the entire proceedings are without jurisdiction and bad in law. It is also the submission of the learned Advocate that the proceedings initiated by Revenue Authorities are wholly without jurisdiction being barred by limitation under Section 73 of the Act since the proceedings over the Appellant have been initiated without there being any finding or allegation.

5. It is also the case of the Appellant that the alleged Service Tax demand is unsustainable in law as it is covered under the Mega Exemption Notification and further Section 102 of the Finance Act and Entry 12A of the Mega Exemption Notification entitles the Appellant for complete exemption from any Service Tax as it is undisputed position of law that the alleged services were rendered by the Appellant to State Authorities. Hence, the exemption to the Appellant is covered in the following manner:-

6. The learned Advocate further submitted that not even a whisper has been made by the learned Commissioner (Appeals) on the said issue as to whether the Department was correct in treating the entire amount retrieved from ITR/Form-26AS to be amounts chargeable to Service Tax. The role of the Department is not limited to just copy – pasting figures retrieved from ITR & Form-26AS but it also extends to a point where it is incumbent upon them to judiciously ascertain as to whether the said amount is actually received for provision of service or has it been received for any other purpose. In the event of the latter, no Service Tax is applicable. That despite this being incumbent upon the Commissioner (Appeals), no finding has been given by the authority to demonstrate that the amount which is getting reflected in the ITR and Form-26AS of the Appellant is against services rendered by it thus being chargeable to Service Tax. Learned Advocate submitted that the impugned Order-in-Appeal is liable to be set aside on this ground alone that no finding on merits of the matter has been given by the Commissioner (Appeals).

7. Learned Departmental Authorized Representative justified the impugned order and prayed that the appeal filed by the Appellant, being devoid of any merits, may be dismissed.

8. Heard both the sides and perused the appeal records.

9. I find that the whole case of demand has been built up merely on the basis of figures shown in the ITR and Form-26AS statement. It is a known fact that Form-26AS statement is prepared by the Income Tax Department, not by the tax payers. There may be chances of error in such statement. It is further seen that the figures shown in Form-26AS statement differs with turnover declared in the Profit & Loss Account. The Department has not made any enquiry to ascertain the reason of difference between the figures shown in the Profit & Loss Account and Form-26AS statement. I find that the demand raised by invoking the longer period of limitation is solely based upon the Profit & Loss Account and Form-26AS statement submitted with the Income Tax Authorities which has been consistently held to be as not proper by the Tribunal in various decisions. Reference stands made to the decision of Hon’ble Madras High Court in the case of M/s Firm Foundation and Housing Pvt. Ltd. vs. Principal Commissioner of Service Tax, Chennai (Mad) pronounced on 06.04.2018 in Writ Petition No.21799 of 2017, as also to the Tribunal’s decision in the case of M/s Sigma Trade Wings vs. Commissioner of Central Excise, Lucknow, Final Order No.70049 of 2019 dated 07.01.2019. It stands held in both the above decisions that the revenue’s reliance upon Profit & Loss Account are irrelevant for the purpose of confirmation of tax. Inasmuch as, the revenue’s entire case is based upon the Profit & Loss Accounts read with the Form-26AS and the Service Tax stands confirmed by invoking the longer period of limitation. It is my considered view that the impugned order of learned Commissioner (Appeals) is not sustainable on limitation itself.

10. Accordingly, I set aside the same and allow the appeal with consequential relief to the Appellant if any, as per law.

(Order pronounced in open court on – 29.09.2025

Notes: 

¹ The Act

² SCN