2025 (3) TMI 684 - AT - Service Tax

Demand for service tax raised against the appellant based on income tax returns and the application of the best judgment method - entire case of Revenue is based upon the Income Tax Returns filed by the appellant with the Income Tax Department - Invocation of extended period of limitation - HELD THAT - From the records it is not coming out whether before issuing the show cause notice any independent enquiry had been conducted by the department to ascertain the receipt of amount in issue towards rendering any taxable service. In the absence of any specific allegation about the nature of service provided or the service recipient it is not justified to held appellant liable for service tax. In order to fasten any duty liability on the appellant the department in the first place has to identify the nature of taxable service and the recipient of such service as well. Section 72 ibid cannot be applied merely on the basis of income-tax return without identifying the specific taxable service and the service recipients. By way of various decisions it is settled legal position that a show cause notice issued on the basis of presumption and third-party information without examining the books of account and records of an assessee is not sustainable. Extended period of limitation - HELD THAT - There was no malafide intention on the part of the appellant to evade payment of service tax. Information derived from the income-tax returns solely cannot be made the basis to confirm the demand of service tax herein by invoking the extended period of limitation as the department has failed to bring on record any positive act or malafide intention on the part of the appellant to evade the service tax. Therefore the demand cannot sustain on the ground of extended period of limitation also. Conclusion - i) The demand based on income tax returns and best judgment was unjustified. ii) The extended period of limitation was not applicable as there was no suppression of facts with intent to evade tax. Appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the demand for service tax raised against the appellant based on income tax returns and the application of the best judgment method is justified.
Whether the invocation of the extended period of limitation for issuing the show cause notice is valid.
Whether the appellant's failure to register for service tax and file returns constitutes suppression of facts with intent to evade tax.
Whether the absence of independent inquiry by the department before issuing the show cause notice affects the validity of the demand.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Demand Based on Income Tax Returns and Best Judgment Method

Relevant Legal Framework and Precedents: The demand was raised under Section 72 of the Finance Act, 1994, which allows for the best judgment assessment in the absence of service tax returns. The court referenced precedents such as Oudh Sugar Mills vs. UOI and Sharma Fabricators & Erectors Pvt. Ltd. vs. Commissioner, emphasizing that demands based on third-party information without examining the assessee's records are not sustainable.
Court's Interpretation and Reasoning: The court found that the demand was unjustified as it was based solely on income tax returns without identifying the specific taxable service or service recipients. The court emphasized that the department must ascertain the nature of the service and the recipient to justify the demand.
Key Evidence and Findings: The court noted that the department did not conduct an independent inquiry or examine the appellant's records before issuing the notice.
Application of Law to Facts: The court applied the legal principle that demands cannot be based on presumptions and third-party data without concrete evidence from the assessee's records.
Treatment of Competing Arguments: The appellant argued that income tax returns alone cannot justify a service tax demand, while the department relied on these returns and best judgment. The court sided with the appellant, noting the lack of specific evidence from the department.
Conclusions: The demand based on income tax returns and best judgment was not justified due to the lack of specific evidence and independent inquiry.

Issue 2: Validity of Extended Period of Limitation

Relevant Legal Framework and Precedents: The extended period of limitation is applicable in cases of suppression, fraud, or willful misstatement. The court referenced the need for a positive act or mala fide intention to invoke this period.
Court's Interpretation and Reasoning: The court found no evidence of suppression or intent to evade tax by the appellant, noting the appellant's bona fide belief of non-liability for service tax.
Key Evidence and Findings: The appellant had disclosed all income in income tax returns and paid direct taxes, indicating no intent to evade service tax.
Application of Law to Facts: The absence of any positive act or mala fide intention by the appellant led the court to conclude that the invocation of the extended period was unjustified.
Treatment of Competing Arguments: The department argued for the extended period based on non-registration and non-filing of returns. The court rejected this, emphasizing the need for evidence of intent to evade tax.
Conclusions: The extended period of limitation was not applicable as there was no evidence of suppression or intent to evade tax.

Issue 3: Suppression of Facts with Intent to Evade Tax

Relevant Legal Framework and Precedents: Suppression requires a deliberate act to evade tax. The court highlighted the need for evidence of such intent.
Court's Interpretation and Reasoning: The court found no evidence of suppression, noting the appellant's full disclosure in income tax returns and lack of service tax registration due to a bona fide belief of non-liability.
Key Evidence and Findings: The appellant's actions were consistent with a belief of non-liability, and there was no evidence of service tax being charged to customers.
Application of Law to Facts: The court concluded that the appellant's actions did not constitute suppression as there was no intent to evade tax.
Treatment of Competing Arguments: The department's argument of suppression was rejected due to lack of evidence of intent to evade tax.
Conclusions: There was no suppression of facts with intent to evade tax.

Issue 4: Absence of Independent Inquiry Before Issuing Show Cause Notice

Relevant Legal Framework and Precedents: The court emphasized the need for independent inquiry and examination of records before issuing a show cause notice.
Court's Interpretation and Reasoning: The court found that the absence of independent inquiry and reliance solely on third-party data invalidated the demand.
Key Evidence and Findings: The department did not conduct any independent inquiry or examine the appellant's records.
Application of Law to Facts: The lack of independent inquiry led the court to conclude that the demand was not sustainable.
Treatment of Competing Arguments: The department's reliance on third-party data was rejected due to the lack of independent inquiry.
Conclusions: The absence of independent inquiry before issuing the show cause notice invalidated the demand.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "A show cause notice issued on the basis of presumption and third-party information without examining the books of account and records of an assessee is not sustainable."
Core principles established: The necessity of independent inquiry and specific evidence before raising a service tax demand; the inapplicability of the extended period of limitation without evidence of suppression or intent to evade tax.
Final determinations on each issue: The demand based on income tax returns and best judgment was unjustified; the extended period of limitation was not applicable; there was no suppression of facts with intent to evade tax; the absence of independent inquiry invalidated the demand.

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