The Customs, Excise & Service Tax Appellate Tribunal set aside a service tax demand of Rs. 19,72,702/- for the period 2013-14 to 2015-16, holding that the appellant’s income from trading and renting residential property was non-taxable under the Finance Act, 1994. The Tribunal found that the department had wrongly invoked the extended limitation period and relied solely on Form 26AS without establishing the nature of service or considering applicable exemptions.
Background & Facts
The Dispute
The dispute arose from a Show Cause Notice dated 22 October 2018 (No. 15/384/2018/8297) issued by the Commissioner (Appeals), CGST and Central Excise, Jodhpur, proposing a service tax demand of Rs. 19,72,702/- together with interest and penalties for the financial years 2013-14 to 2015-16. The appellant, Shrimati Anju Makhija, contended that her income from trading activities and from renting immovable property for use as residence was outside the scope of taxable service under the Finance Act, 1994.
Key Facts
- The appellant was engaged in providing services as defined under Section 65B(44) of the Finance Act, 1994.
- The department observed that the appellant was neither registered with the service tax department nor paying service tax.
- Third-party information was received from the income tax department regarding TDS of Rs. 1,40,65,334/- deducted by service recipients during the period in dispute.
- The Show Cause Notice (SCN) dated 22/10/2018 proposed demand and recovery of Rs. 19,72,702/- as service tax for 2013-14 to 2015-16, with interest under Section 75 and penalties under Sections 77 and 78 of the Finance Act, 1994.
- The appellant filed a written reply to the SCN on 29/11/2018, stating that:
- Income was received from renting three immovable properties for use as residence.
- Renting for residence purposes is exempted under exemption notification No. 9/2017 and the Mega Exemption Notification No. 25/2012-ST dated 20/06/2012.
- The aggregate value received was below the threshold limit.
- The department confirmed the demand via Order-in-Original No. 41/2020 dated 30/04/2020.
- The appellant appealed against this order; the Commissioner (Appeals) passed Order-in-Appeal No. 124/CRM/ST/JDR/2021 dated 08/06/2021, upholding the demand.
- The appellant filed further written submissions on 11/03/2021 and 16/03/2021, annexing documents and challenging the department’s findings of non-cooperation.
- During the period 2013-14 to 2015-16, the appellant admittedly received:
- Trading/sales income of Rs. 94,93,000/-.
- Rent income of Rs. 57,50,000/- from letting immovable property.
- The trading activity was carried out under the name M/s Shri Sawariya Traders, but the Commissioner (Appeals) recorded, based on income tax returns, that the appellant was proprietor of M/s Anjali Traders, with no evidence linking her to Sawariya Traders.
- The Tribunal held that trading/sale constitutes transfer of title in goods, which is expressly excluded from the definition of service under Section 65B(44).
- For the rent income, the appellant asserted the property was rented for use as residence (hostel). Section 66D clause (m) specifically excludes services by way of renting of residential dwelling for use as residence from taxable service under Section 66B(44).
- The Tribunal noted that the department had not produced any documentary evidence (e.g., rental agreement) to contradict the appellant’s claim that the property was used for residence.
- The Tribunal concluded that the appellant acted in bonafide belief that her activities were non-taxable; thus non-payment and lack of registration could not be treated as intentional suppression of material facts.
- The department had invoked an extended limitation period while issuing the SCN, but the Tribunal found no evidence of fraud, wilful misstatement or suppression to justify such extension.
- Reliance was placed on the principle that the burden to prove malafide lies on the department, and mere non-payment does not attract the five-year limitation.
- The Tribunal also held that a demand based solely on Form 26AS cannot be sustained without clear identification of service provider, recipient and consideration, citing its own prior decisions.
Procedural History
- 22/10/2018: Show Cause Notice No. 15/384/2018/8297 issued, proposing demand of Rs. 19,72,702/- plus interest and penalties.
- 29/11/2018: Appellant’s written reply to the SCN submitted.
- 30/04/2020: Order-in-Original No. 41/2020 passed, confirming the demand.
- 08/06/2021: Order-in-Appeal No. 124/CRM/ST/JDR/2021 dated 08/06/2021 passed by Commissioner (Appeals), upholding the demand.
- 11/03/2021 and 16/03/2021: Further written submissions filed by the appellant annexing documents and challenging the department’s findings.
- 15/05/2026: Date of hearing before the Customs, Excise & Service Tax Appellate Tribunal.
- 15/09/2026: Date of decision (judgment pronounced) and final order No. 51465/2026 issued.
Relief Sought
The appellant sought to set aside the impugned Order-in-Appeal No. 124/CRM/ST/JDR/2021 dated 08/06/2021, to have the service tax demand of Rs. 19,72,702/- quashed, and to be relieved from any interest, penalty or further liability arising therefrom.
The Legal Issue
The central questions were: (i) whether the appellant’s income from trading activities and from renting residential property constituted taxable service under Section 65B(44) of the Finance Act, 1994; (ii) whether the department was justified in invoking the extended limitation period while issuing the Show Cause Notice; and (iii) whether a service tax demand could be sustained solely on the basis of Form 26AS without establishing the nature of service, the recipient and the consideration.
Arguments Presented
For the Appellant/Petitioner
The appellant argued that trading or transfer of title in goods is expressly excluded from the definition of service under Section 65B(44); that renting immovable property for use as residence is exempt under exemption notification No. 9/2017 and the Mega Exemption Notification No. 25/2012-ST, read with Section 66D clause (m); that the department failed to produce any documentary evidence to contradict the claim of residential use; that the burden to prove malafide lies on the revenue authority and mere non-payment does not attract the extended limitation period; and that reliance on Form 26AS or income-tax returns alone is insufficient to sustain a service tax demand without establishing the nature of service, recipient and consideration.
For the Respondent/State
The department contended that the appellant was liable to pay service tax on the gross receipts reflected in Form 26AS; that third-party information from the income tax department was sufficient to initiate proceedings; that the appellant did not cooperate or produce documents such as rental agreements; that the extended limitation period was justified due to suspected suppression of material facts; and that the findings of the Commissioner (Appeals) should be upheld.
The Court's Analysis
The Tribunal began by examining the definition of service under Section 65B(44) of the Finance Act, 1994. It held that trading or transfer of title in goods falls outside this definition, a position supported by precedents such as Faquir Chand Gulati v. Uppal Agencies Pvt. Ltd. (2008) and Shubham Electricals v. CCE (2015). Regarding the rent income, the Tribunal noted that Section 66D clause (m) expressly excludes services by way of renting of residential dwelling for use as residence from taxable service under Section 66B(44). The Tribunal accepted the appellant’s contention that the property was rented for use as a hostel, which qualifies as a residential dwelling, and found no contrary evidence from the department.
On the limitation issue, the Tribunal quoted the principle that "The burden to prove malafide of noticee is on department who makes the allegation. Onus to prove bonafide conduct is not on notice even in terms of Sec-28 of the Customs Act." It found no proof of fraud, wilful misstatement or suppression; mere non-payment could not attract the five-year period. The Tribunal also held that a demand based solely on Form 26AS cannot be sustained without independent verification of the nature of receipts, the service provider, recipient and consideration, citing its own decisions in Manoj Kumar Anand vs Commissioner of Central Excise Jodhpur (2025) and the Chandigarh bench case M/s Indian Machine Tools Manufacturer Association vs Commissioner Excise Punchkula (2023).
Thus, the Tribunal concluded that the service tax demand was not established on either head of income, that the extended limitation period was wrongly invoked, and that the order under challenge must be set aside.
"The burden to prove malafide of noticee is on department who makes the allegation. Onus to prove bonafide conduct is not on notice even in terms of Sec-28 of the Customs Act."
The Verdict
The Tribunal allowed the appeal, set aside the Order-in-Appeal No. 124/CRM/ST/JDR/2021 dated 08/06/2021 and consequently quashed the service tax demand of Rs. 19,72,702/- together with interest and penalties. It held that the liability was not established because the appellant’s trading income fell outside the scope of service under Section 65B(44) and the rent income was exempt under Section 66D clause (m). The extended limitation period was deemed unjustified as no evidence of fraud, wilful misstatement or suppression was found. No costs were awarded.
What This Means For Similar Cases
When Income Arises from Trading or Transfer of Goods
- Trading or transfer of title in goods is expressly excluded from the definition of service under Section 65B(44) of the Finance Act, 1994.
- Tribunals and courts will not treat such receipts as taxable service unless there is evidence of a service element beyond mere sale.
Renting Residential Property Qualifies for Exemption
- Income from renting immovable property for use as residence is exempt under Section 66D clause (m) read with Section 66B(44).
- Claimants must retain rental agreements, receipts and correspondence to substantiate the residential use; mere absence of documents does not defeat the exemption if other evidence supports the claim.
Limitations on Departmental Power to Invoke Extended Limitation
- The department may extend the limitation period only upon proof of fraud, wilful misstatement or suppression of material facts.
- Mere non-payment or inadvertent omission does not attract the five-year period; the burden to prove malafide rests on the revenue authority.
- Reliance solely on Form 26AS or income-tax returns without independent verification of the nature of receipts is insufficient to sustain a service tax demand.
