CESTAT Quashes Service Tax Demand Based on ITR Discrepancy, Orders Fresh Adjudication

CESTAT Quashes Service Tax Demand Based on ITR Discrepancy, Orders Fresh Adjudication

Introduction

The Mumbai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand that was based solely on a discrepancy in an Income Tax Return (ITR), criticizing the adjudicating authority for failing to examine concrete evidence.

Factual Background

MX Systems International Private Limited, a company that sells and installs fire extinguishers, was issued a service tax demand of ₹4.72 crore for the financial year 2015-16. The demand was based on a discrepancy between the company's service turnover as reported in its service tax return (₹9.34 crore) and its ITR (₹41.93 crore).

Procedural Background

The company argued that the discrepancy was due to a clerical error in the ITR classification, where income from the sale of goods was mistakenly declared under ‘income from services.’ The appellant provided a detailed reconciliation, along with VAT payment documents, to prove that over ₹38 crore of the declared amount was actually from the sale of goods, which is not taxable under service tax.

Contentions of Parties

Appellant: The appellant argued that the income from the sale of goods was mistakenly declared under ‘income from services’ in the ITR, and provided evidence to support this claim.

Revenue: The revenue authorities contended that the company should have revised its ITR and that the statutory ITR document held more weight.

Reasoning and Analysis

The CESTAT bench found the adjudicating authority's reasoning flawed, as it failed to examine the evidence presented by the appellant. The tribunal held that the authority's job was not to blindly trust one statutory filing over another but to actively examine the evidence presented.

The bench comprising Ajay Sharma, Member (Judicial), and Mathew, Member (Technical) referenced the principle established in the Dinesh Chandra R Agarwal V. Commissioner of CGST (2023) case, which held that a mere mismatch between returns filed with different agencies cannot be the sole basis for extending the limitation period without specific findings of intent to evade tax.

Decision

The CESTAT set aside the service tax demand and remanded the matter to the original authority for a fresh decision, directing the authority to properly consider the documents provided by the assessee.