Service Tax Demand Cannot Be Based Solely on Form 26AS: CESTAT Ruling

The Allahabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has clarified that service tax demands cannot be raised solely on the basis of figures reflected in Form 26AS without proper reconciliation with ST-3 returns and the taxpayer’s business records.

This significant ruling came in the case of Shri Sai Financial Services, a proprietorship firm owned by Tilak Singh, which was engaged in providing financial services.

Case Background

The Revenue authorities raised a service tax demand against Shri Sai Financial Services by relying exclusively on the data available in Form 26AS (Annual Tax Statement). The department alleged that the income figures reflected in Form 26AS were not in sync with the ST-3 returns filed by the taxpayer and, therefore, additional service tax was payable.

The assessee challenged the demand, arguing that the figures in Form 26AS were gross values that included non-taxable and exempted components. It was also contended that no effort was made by the department to reconcile these figures with the actual turnover, invoices, or ST-3 returns.

CESTAT’s Observations

The tribunal observed that Form 26AS alone cannot be treated as conclusive evidence for determining service tax liability. There must be a proper verification and reconciliation of data between:

• Form 26AS
• ST-3 returns
• Books of accounts, invoices, and supporting records

The bench highlighted that without this reconciliation, a demand is unsustainable. The tribunal further held that tax cannot be imposed on assumptions or presumptions merely because of mismatches in reported data.

Key Points from the Judgment

1. Form 26AS is not Final Proof:
   The figures in Form 26AS are derived from TDS deductions and may include exempt or non-service-taxable transactions.
2. Reconciliation is Essential:
   A proper comparison with ST-3 returns and business records is mandatory before raising any tax demand.
3. Revenue’s Failure to Verify:
   In this case, the Revenue had not verified invoices, service categories, or exemptions, making the demand invalid.
4. Tax Demand Cannot be Based on Assumptions:
   Mere discrepancies between Form 26AS and ST-3 returns cannot be grounds for a confirmed service tax demand.

Impact of the Ruling

This decision will provide relief to many taxpayers who face arbitrary service tax demands based on Form 26AS data without proper verification. It sets a precedent that revenue authorities must conduct thorough scrutiny and ensure accurate reconciliation before issuing tax notices.

FAQs

1. What is Form 26AS?
Form 26AS is an annual consolidated tax statement reflecting TDS, advance tax, and other tax-related information for a taxpayer.

2. Why is reconciliation with ST-3 returns necessary?
Because Form 26AS may include non-taxable income, reconciliation ensures that service tax is levied only on taxable services.

3. What was the main argument of Shri Sai Financial Services?
The assessee argued that the department did not verify actual turnover and relied solely on Form 26AS, which was incorrect.

4. Does this ruling apply to GST?
Though this case is related to service tax, the principle of proper reconciliation before raising demands is equally important under GST.

Conclusion

The Allahabad CESTAT ruling underscores the importance of accuracy and due diligence in tax administration. Tax authorities cannot rely solely on Form 26AS figures to determine tax liability without examining actual business transactions and returns. This decision will act as a safeguard against arbitrary tax demands and reinforces the principle that tax must be levied only on verified and taxable amounts.

 Published on: 19 July 2025
 Author: CS Chhavi Goyal