Providing of taxable service is a must to impose service tax- amount found as undisclosed income may not be from taxable services.

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Commissioner of Central Excise Commissionerate, Ludhiana Versus M/s Mayfair Resorts, NHI, Jalandhar 2011 -TMI - 203518 - PUNJAB AND HARYANA HIGH COURT

 Kipps Education Centre Bathinda Vs. CCE Chandigarh 2008 -TMI - 31487 - CESTAT NEW DELHI Other Citation: [2008] 17 STT 306 (NEW DELHI - CESTAT), 2009 (13) S.T.R. 422 (Tri. - Del.)

Rampur Engineering Co. Ltd. Vs. CCE  2007 -TMI - 871 - Appellate Tribunal, New Delhi/  2006 (3) STR 650

Essentials to levy service tax-taxable service, service provider/receiver

and taxable type of consideration:

The basic essentials for attracting service tax liability are rendering of taxable service, by a  service provider who falls in a taxable category and  availing of service by a service  receiver who falls in a category on which service tax is attracted and also nature of consideration received which falls into category of taxable value of service.

When there is no such service, no such service provider no such service receiver, and taxable type of consideration received or accruing then there is no question of levy of service tax. But unfortunately , the service tax department is indulging into unnecessary litigation by issuing SCN, raising demands and disputing orders of appellate authorities on such clear issues as appears from reported judgments.

Undisclosed income under Income-tax Act,1961:

Under the provisions of the Income-tax Act, 1961 in many situations certain receipts or credits can be regarded as income liable to tax. Such receipts can be in nature of un-established cash credits, certain receipts deemed as income, undisclosed expenses , properties, cash or investments etc. The sources of such receipts can be of varied type and not necessarily falling under taxable category as ‘income from business or profession’.

Undisclosed income or certain deemed income in form of gifts, undisclosed cash, investments  etc. are is generally assessable as income from ‘other sources’. Such income may not have any connection with business or profession.

Rendering of services and income-tax:

Income from rendering of services is income from business, profession or vocation. Such income shall properly and generally fall under the head ‘income from business or profession’, except some cases where rental income may fall under head ‘income house property’ or ‘income from other sources’.

Undisclosed cash:

An assessee may introduce cash or other assets as income, if he is unable to prove  to the satisfaction of the Assessing Officer source and nature of such cash or assets as ‘capital receipt’ or other receipt not liable to income-tax.

Cash surrendered as income to income tax authorities can be from any source and not necessarily from rendering of taxable services. Therefore, it cannot necessarily be considered as charges or fees for taxable services provided. However, the service provider must, in his own interest establish that the cash balance surrendered is not earned by rendering taxable services. This he can do by establishing that the cash balance is from some other activities or sources of income or is loan taken from other parties who are not cooperating in establishing genuineness of loan or other credit etc. 

Case before High Court about Surrendered cash and service tax: 

CCCE Vs.  M/s Mayfair Resorts, NHI, Jalandhar 2011 -TMI - 203518 - PUNJAB AND HARYANA HIGH COURT relates to such a situation.

As appears from the name of service provider the service provider is a Resorts, and is also having Madap in its resort.  Services of mandap Keeper are taxable services.

The service provider had surrendered Rs. 35 lacs before the Income Tax Authorities.

Service Tax authorities contended that the sum of Rs.35 lacs is also liable for consideration as taxable services from Mandap. The Tribunal held no and decided the issue in favor of service provider.

Therefore appeal was preferred by the revenue under Section 35G of the Central Excise Act, 1944 against order dated 28.7.2010 passed by the Customs, Excise & Service Tax Appellate Tribunal, New Delhi claiming following substantial question of law:-  

“i) Whether Tribunal is justified in holding that the amount of Rs. 35 lacs surrendered to the Income Tax Authorities is not attributable to consideration received in relation to Mandap Keeper Services?”  

Observations of High Court (and comments of author are given in bracket):

1. The assessee is registered with the Service Tax Department under the category 'Mandap Keeper'( not liable for any other service).
2.  During audit for the period of 2004-05, it was noticed by the Department that the assessee surrendered Rs. 35 lacs to the Income Tax Department as additional taxable income on the said amount being found cash at the premises of the assessee and the assessee being unable to explain the source of income. (The finding of audit party is only about cash surrendered as income and nothing that it relates to services rendered as Mandap)
3. The department contended that  since only business of the assessee was providing service of 'Mandap Keeper', the amount represented proceeds of services provided by the assessee.
4. Amount was treated as subject to service tax vide order-in-original dated 28.1.2009.
5. On appeal, the said order was set aside on the ground that without making any enquiry and in absence of any statutory presumption, the department could not treat the amount as representing proceeds of services provided by the assessee.
6. The view taken by the Tribunal to this effect in Kipps Education Centre Bathinda Vs. CCE Chandigarh 2008 -TMI - 31487 – (CESTAT NEW DELHI) was followed.
7. The said order has been affirmed by the Tribunal.  
8. High Court heard learned counsel for the appellant.

The High Court observed and held as follows (with highlights added by author for analysis):

              “Apart from the fact that it was for the department to show the evasion of service tax and that the money found with the assessee represented proceeds of services provided by it, the Commissioner and the Tribunal have followed an earlier order of the Tribunal. On being asked, learned counsel for the revenue states that he has no knowledge about the status of the order. When an appeal is filed by the department, the least expected from the counsel for the department is to know the status of the order followed in the impugned order. In absence thereof, the representation by the department can hardly be responsible representation. We hope the department and its counsel will take appropriate measures in this regard.”  

   “ No substantial question of law having been shown to arise, the appeal cannot be entertained. “

And  therefore the High Court Dismissed the appeal.  

Conclusion:

 The department need to show the evasion of service tax and that the money found with the assessee represented proceeds of taxable services provided by it.

Cautionary points for taxpayers:

It seems that in this case the case made out by Service Tax Department was weak and the Counsel of Revenue also could not inform about status of  earlier Judgment/ Decisions of Tribunal which were relied on by Commissioner and Tribunal. There was no argument that facts were different. Therefore, the service provider won the case.

To play safe and to make the case in favor of the service provider, he should also have provided evidence that the cash offered as income was not from taxable services rendered. It is true that there is no presumption and the revenue is to establish the case that there were realizations from taxable services, however, the service provider should also be ready to establish that the case was not from taxable services.