In the past few months several taxpayers have received notices from the Service Tax and the Excise Department for either short payment of taxes or claim of excess refund. Interestingly, the issuance of all such notices was barred by limitation in the usual course, so, the department invoked the extended period of limitation to issue such notices. The pertinent question here is whether the extended period of limitation was invocable at all in all such cases or the Department blatantly took shelter of the provision and arbitrarily used it to just begin the proceedings. Were the notices valid and legally sustainable? Before going into the validity of notice one should be knowing the meaning and provisions related to extended period of limitation.
Extended period to issue notice in both excise as well as service tax is invoked when there is fraud/ suppression of facts which results in loss of revenue to the government. The relevant provision in Excise Law as per section 11A(4) is reproduced as under:
(4) Where any duty of excise has not been levied or paid or has been short levied or short-paid or erroneously refunded, by the reason of-
(a) fraud; or
(b) collusion; or
(c) any wilful mis-statement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, by any person chargeable with the duty, the Central Excise Officer shall, within five years from the relevant date, serve notice on such person requiring him to show cause why he should not pay the amount specified in the notice along with interest payable thereon under section 11AA and a penalty equivalent to the duty specified in the notice.
Similar provision in Service tax law is specified in proviso to section 73(1) of Chapter V of The Finance Act, 1994 which is as follows:
PROVIDED that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of-
(a) fraud; or
(b) collusion; or
(c) wilful mis-statement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax,
by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words “thirty months, the words “five years” had been substituted.
It is clear that the provisions contained in both the laws are exactly the same. Further, both the provisions have a prerequisite condition that there should be an intention to evade tax. In many cases it is very difficult to find out the intention of the taxpayer and in all those cases the onus will be on the department to prove that there was an intention to evade tax by suppression of facts. Moreover, financial information and data are required to be presented to various authorities under different statutes like Income tax, service tax, Central Excise and Company Law. If a taxpayer has disclosed the information to any such authority, it can not be said that there was suppression of facts by the taxpayer. There are several court rulings in favor of the taxpayer where notice itself was quashed, in the absence of proper reasoning by the department with respect to alleged suppression of the facts.
The most important aspect to note is how should such notices be replied to, apart from the grounds taken on merit. The validity and legality of such notices must be challenged in such replies. Some of the judgments which can be cited while replying to such notices are highlighted under:
- Case of Continental Foundation Jt. Venture versus Commr. Of C.Ex. Chandigarh-I [2007 (216) E.L.T. 177 (S.C.)]: In this case the Hon’ble Supreme Court observed that the expression “suppression” has been used in the proviso to Section 11A of the Excise Act accompanied by very strong words as ‘fraud’ or “collusion” and, therefore, has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it was deliberate to stop the payment of duty. Suppression means failure to disclose full information with the intent to evade payment of duty. When the facts are known to both the parties, omission by one party to do what he might have done would not render it suppression. When the Revenue invokes the extended period of limitation under Section 11A of the Excise Act the burden is cast upon it to prove suppression of fact. An incorrect statement cannot be equated with a willful misstatement. The latter implies making of an incorrect statement with the knowledge that the statement was not correct.
- Case of Anand Nishikawa Company Ltd. vs. Commissioner of Central Excise – 2005 (188) E.L.T. 149 (S.C.): In this case, the Hon’ble Supreme Court held that the term ‘suppression’ must be construed strictly. It does not mean any omission and the act must be deliberate and willful to evade payment of duty.
- Case of Om Sai Professional Det. & Security Ser. P. Ltd. Versus C.C.E., Guntur, [2008 (10) S.T.R. 59 (Tri. – Bang.)]: In this case it was held that the Department has issued the show cause notice against the appellants on the basis of Income Tax returns. Since the details were disclosed in the income tax returns of the appellant, the allegation of suppression of facts does not have legs to stand upon.
While contesting with the department on the ground of extended period of limitation, it has to be examined what was the source of the information on the basis of which department came to know that there was evasion of tax. If the source was readily available with the department then invoking the extended period of limitation does not seem justified.
Information Exchange:
It is well-known that the CBIC and CBDT have signed memorandums to exchange information or share data amongst themselves. This move had been taken to facilitate adjudication and improve transparency of data flow between the Revenue Departments of Government of India. This sharing of data should ideally reduce the notices invoking extended period of limitation. However, even if this does not happen, this ground of data availability with the Department can be taken at the time of filing reply to such notices, which is proof enough to substantiate that there was no suppression of facts.
Extended Period of limitation in GST era
In the GST regime, the provisions of demands and recovery proceedings in the case where there was suppression of facts with the intent of tax evasion is covered in section 74 of CGST Act, 2017.
Relevant extract of section 74(1) is as under:
Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.
In the GST regime, at present, the need for invoking the extended period of limitation has not yet arisen. Even then, this section is generally invoked for levying a higher amount of penalty as prescribed in the law in cases of tax evasion. The same cases as cited above, may be used to contest the higher amount of penalty and notices issued under Section 74.
Published in ACAE’s House Journal – March 2022 edition (Click here to visit)
Author: CA Manish Raj Dhandharia