HC sets aside service tax notice issued on the basis of information retrieved from income tax record

Clipped from: https://www.ey.com/en_in/alerts-hub/2021/03/hc-sets-aside-service-tax-notice-issued-on-the-basis-of-information-retrieved-from-income-tax-record

This Tax Alert summarizes a recent Bombay High Court (HC) ruling1. The issue in the writ petition involved was whether show cause-cum-demand notice can be issued basis the information retrieved by the department from income tax record.

The petitioner is a partner in a firm. Basis the information collected from the income tax return filed by the firm, Revenue formed a view that the remuneration received by petitioner from the firm was subject to service tax. Accordingly, a show cause-cum-demand notice (notice) was issued.

Aggrieved, the petitioner filed a writ petition before the HC.

Revenue, in its reply affidavit, admitted that activities undertaken by the petitioner as a partner (profit sharing) or salaried individual were not liable to service tax under the Finance Act, 1994. Thus, to this extent, the notice may be withdrawn. However, certain clarifications were still needed from the petitioner regarding income from other sources.

Petitioner submitted that in view of Revenue’s admission, the notice should either be withdrawn or quashed. Basis the material if any, for clarifications on other issues, department can issue a fresh notice.

Accordingly, HC set aside and quashed the notice, clarifying that department may be at liberty to issue a fresh show cause notice in such case.

Comments:

In the past, notices were being issued to businesses basis the data mismatch between income tax and service tax records. The observation of the Court that service tax cannot be demanded merely basis information collected from income tax and without verifying the taxability of the transaction, may help in reducing unwarranted litigation.

It is pertinent to note that the Revenue has admitted the position that partner’s remuneration (profit share or salary) is not liable to service tax. The same position may also hold good under Goods and Services Tax (GST).

[1] TS-77-HC-2021(BOM)-ST

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