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February 2, 2021

Can demand notice for recovery of service tax be issued based on ITR?

by CA Shivam Jaiswal in Income Tax

Can demand notice for recovery of service tax be issued based on ITR?

Once the assessee files his return of income the income tax department scrutinizes his return and issues assessment intimations, scrutiny notices etc. This applies even if the assesses does not file his return of income.

The following Notices can be issued under the Income Tax Act:

Notice Under Section 142(1)

A notice under section 142(1) can be issued under two circumstances:

  • If you have filed your return, but the assessing officer requires additional information and documents; or
  • If you have not filed your return, but the assessing officer wants you to file it.

The information is called for, to enable the officer to make a fair assessment.

Notice Under Section 143(2)

The purpose of this notice is to notify the assessee, that the return filed has been picked for a scrutiny.

It is pertinent to note that the section under which it will be scrutinized is different from the one in which the notice has been issued. By a detailed scrutiny, the assessing officer intends to be assured that you have not done any of the following:

  • Understated your income;
  • Claimed excessive loss; or
  • Paid lesser taxes

Notice Under Section 148

  • An assessing officer may have a reason to believe that you have not disclosed your income correctly and therefore, you have paid lower taxes.
  • Alternatively, you may not have filed your return at all, even if you must have filed it as per law. This is termed as income escaping assessment.
  • Under these circumstances, the assessing officer is entitled to assess or reassess your income, according to the case.
  • Prior to making such assessment or reassessment, the assessing officer should serve a notice to the assessee asking him to furnish his return of income. The notice issued for this purpose is issued under the provisions of Section 148.

Notice Under Section 245

  • If the assessing officer has reason to believe that tax has not been paid for the previous years and he wants to set off the current year refund against that demand, a notice under Section 245 can be issued.
  • However, the adjustment of demand and refund could be done only if you have been provided a proper notice and an opportunity to be heard.
  • The timeline to respond to the notice is 30 days from the day of receipt of the notice. If you do not respond within the aforesaid timeline, the assessing officer can consider this as a consent and proceed with the assessment.
  • Therefore, it is advisable to respond to the notice at the earliest.

However, can a notice be issued for recovery of service tax? Let us refer to the case of AmrishRameshchandra Shah Vs the Union of India &Ors. (Bombay High Court), where the issue under consideration was whether show cause-cum-demand notice for recovery of service tax can be issued based on ITR.

Facts of the Case:

  • Petitioner was a Chartered Accountant by profession and is a partner in a firm.
  • The firm had filed income tax return and had paid service tax.
  • Based on the declaration made in the income tax return, a view was taken by respondentthat the remuneration received by the petitioner from the firm was subject to service tax and since that has not been paid, impugned show cause-cum-demand notice was issued.

What was contended by the petitioner?

  • According to the petitioner the impugned show cause-cum-demand notice was issued without jurisdiction.
  • Petitioner referred to a decision of the Central Excise and Service Tax Appellate Tribunal, in Alpa Management Consultants P. Ltd. Vs. Commissioner of Service Tax, 2007, where CESTAT has held that service tax could not be recovered based on the returns shown in the income tax returns.
  • He further submitted that appeal filed by the service tax department before the Karnataka High Court was dismissed on the ground of maintainability whereafter service tax department approached the Supreme Court.
  • Supreme Court dismissed the civil appeal filed by the Commissioner of Service Tax.

What was held by the High Court (HC)?

The Bombay High Court issued notice to the Respondents to file their reply by the next date and stayed the impugned show cause-cum-demand notice.

The High Court also listed the matter on March 15, 2021 for the hearing.

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