Difference – ST vs. IT returns (AS26)

21-11-2020 Adv Surabhi Parihar, CA Madhukar N Hiregange

Analyzed of Causes of Differences

The sharing of the income tax returns with the service tax, central excise and VAT authorities has been a long drawn exercise with last arrangement agreed in 2015, however lately CBIC and CBDT have entered into a MOU in 2o14 and again in 2020 to facilitate exchange of data on a regular and automatic basis.

This arrangement should have enabled the respective tax departments to look at the differences between taxable turnover reflected in service tax and the receipts reported in the IT returns to understand the difference between them and the need to reconcile the same. In the event of turnovers not matching all possible reasons should have been analyzed. However, the respective tax departments seemed to have missed this opportunity in large part leading to a huge leakage of revenue. Audit report of CAG has examined and found shortcomings in the monitoring mechanism for recovery of arrears in CBIC where total ST arrears have rose to 1.66 lakh crore in 2017-18 and Rs. 96,496 crore in respect of central excise arrears. 

However, lately due to paucity of time [possibly time bar], department initiated action/ enquiries for mismatch and reconciliation and the tax officers have finally started to look into this aspect and started enquiries. Further may be due to time constraints they have issued notices. In most instances it may have been done without application of mind. Resultantly, doctors and others exempted service providers are being issued bulk enquiries to report difference in turnover between the service tax returns and income tax returns.

Pertinently what requires examination is whether it is too late to initiate recovery action that is per se going beyond period of limitation? Whether the notices generally being blindly issued without examination of valid reasons on assumption that gross difference is tax evaded? Whether demand is merely based on an old audit observation? Whether 90% of notices unlikely to result in any recovery?

The answer in the view of the writers is department may lose majority of the cases. In this article we examine the issue only under indirect taxation i.e. Central Excise, Service Tax and VAT. An attempt to examine the reasons for the differences would support the professional or the officer conducting the verification which may have escaped tax.

One of the major reasons for issuance of these type of notice’s is that the appropriate columns are not correctly filled in the ST-3 return, Egg: Export of services is not disclosed in the relevant column in the ST-3 return, which results in difference between the ST-3 return and income tax return. If the details of export of service was rightly disclosed, there would be no reasons for the department to issue notice for difference between income tax returns vis-s-vis ST-3 return.

In ST-3 return, there is a particular column to mention the notification no, if any pertaining to exemption/ abatement if any claimed, due to non- mentioning of appropriate notification no, Department would not be aware of the exemption/ abatement claimed by the assessees. A professional approach should be followed while filing the ST-3 return, ensuring such notices are avoided.

Reasons for Difference

Since the intention of the writers is to analyze the difference in turnover reflected in ITR and ST-3, these could be analysed under general and also as specific only to Central Excise VAT and Service tax.  

  1. General:
  1. Different accounting norms adopted for revenue recognition, results in difference in taxable turnover. As per Accounting Standard -07 vis-a-vis, Determination of  Value of  Service Rules 2006 etc. that result in reporting different taxable turnover. In case of works contract service, there is deduction towards value of materials for original works at 60%, and service tax is paid only on 40% of the value, whereas under income such deduction is not available, resulting in difference.
  2. Since the principles of levy, determination of value, methodology etc. under income tax, service tax, central excise and VAT/ CST are different, this results in difference. Thus, mere difference in turnover should not be a cause for issuance of notice unless other attributes, like non-payment of tax etc. is satisfied. However, difference brought out in reconciliation without justifiable reason should not have led to such SCN’s. 
  3. There are many products or services that are exempted under service tax law or excise law, some may be partially exempted or exempted due to end use. However it would be taxable under income tax law, resulting in difference between the two laws.
  4. Some service providers follow cash basis of accounting i.e. receipt basis under service tax law in terms of 3rd proviso to Rule 6 of Service tax Rules. and income tax returns are filed on accrual basis, resulting in difference in taxable receipts.
  5. Export of goods or services in most cases is not liable to indirect taxes and thus may not have been declared in ST-3 returns, are declared as are non-taxable. Similarly, services rendered from a non-taxable territory to another non-taxable territory is also not taxable under IDT, but taxable under IT which results in substantial difference in the taxable turnover reported in returns.
  6. Transactions outside the territorial jurisdiction of India normally not liable to IDT but may require reporting in income tax due to which there is difference in the reported taxable receipts and turnover.
  7. Transactions with related parties that provides for different valuation mechanism considering the deemed valuation under Indirect tax laws vis-à-vis income tax could result in difference in reported turnover. Which would be a reason for difference in turnover between the two returns,
  8. Liquidated damages / penalties at times is not liable under IDT but considered as income under IT reflected in taxable receipts but not reported under the taxable turnover under indirect taxes resulting in difference in turnover.
  9. ITR / 26AS have PAN India figure whereas registration under excise / service tax is de-centralized. Thereby notices are issued asking cross jurisdictional excise / service tax data on the differential turnover reflected. Which is also one of the major reasons for difference between income tax returns and service tax return?


  1. Service tax
  1. Due to the concept of reverse charge, where liability is cast on the specified recipient of service (company) it would result in difference in the turnover. Eg. Income of individual security service provider providing services to company, the company is liable to pay service tax under reverse charge. The individual security service provider would disclose the income in his income tax returns, resulting in difference between income tax returns and service tax return.
  2. There are special valuation Rules for money changers, restaurant service providers, outdoor caters, which prescribes special valuations to discharge service tax. This difference in value results in difference.
  3. Similarly there are special rates of taxes to be paid by air travel agents, which would result in difference in income disclosed under service tax law and income tax.
  4. In case of goods transport agencies providing services to companies, service tax is paid by the recipient of service, i.e. companies, whereas the income is disclosed under income tax return, resulting in difference of income.
  5. Service providers engaged in providing exempted services to Government departments, which are covered under exemption notification 25/2012-ST, as amended from time to time. vis-à-vis income reported under income tax returns, results in difference.
  6. Service provider’s engaged in providing services which are covered under any of the exemption entries of notification 25/2012-ST, as compared to the incomes disclosed under income tax act, would result in difference of income between the two turnovers.
  7. Re-imbursement of expenses as pure agent would not be liable to service tax, provided the conditions of pure agent as satisfied in terms of Rule 5(2) of Service Tax (Determination of Value) Rules 2006. If the assessee is working as a pure agent it would result in difference in turnover between income tax returns and service tax return. Reimbursement of expense without provision of service cannot be subjected to service tax, however if the same is accounted as income by the assessee, narrations in the books of accounts needs to appropriate, to substantiate it as a mere reimbursement of expense and not an income.  
  8. Provision of salary Vs Service of director, would require careful look if the receipt pertains to salary income or service income reported as professional income in form 26AS/ income tax returns. no service tax is payable on salary income which is a cause of difference between the service tax return and income tax return.
  9. In case any amount paid to director by the company, other than as salary, would be subjected to reverse charge in the hands of company, under service tax law. Wherein the director would have to disclosed this as an income under income tax law, which would result in difference between service tax law and income tax law.
  10. Mistakes by reason of abundant caution by the receivers of goods or services in relation to TDS compliance of 26AS of Income tax would result in difference in ST-3 turnover.
  11. The concept of deemed services under service tax on which tax is liable to be discharged Vs. different accounting concept adopted in ITR/Books based on revenue recognition as per AS-9 would result in difference in reported turnover between the two laws.
  12. On services that are allowed as abatement, tax is paid on abated value under service tax law, however under income tax TDS is deducted on full value. Which results in difference between the two laws, resulting reconciliation issue.
  13. Service provider is engaged in providing multiple services wherein few services are taxable while few services are conditionally exempted. However for the purpose of income tax full value is reported, resulting in difference and requires careful examination.


  1. Central Excise
  1. Principle of levy under central excise is where duty is payable on removal of goods and not on sale of goods would result in timing difference between income tax laws and Central Excise Laws.
  2. Stock transfer from factory to depot would be liable under Central Excise law, whereas the same would not be liable under income taxes, resulting in difference between the two.
  3. Deemed valuation in case of goods removed from job workers premises to the customer, duty is required to be paid on selling price of the customer, which may not be the value for the purpose of income tax, resulting in difference between the two laws.


  1. VAT/ CST
  1. Assessments for periods prior to July 2017 is yet to be completed under VAT laws. Which could result in change turnover between the VAT laws and income tax laws.

Stages of Revenue Action

  1. Oral Enquiry: Assessee may make a firm request to send email or letter in relation to such oral enquiry for records and reference. Provided each correspondence to be verified whether contained with a DIN.
  2. Enquiry on explaining the difference: The reply should be sent by email + RPAD/ Speed Post to ensure that it is evidenced and recorded. Oral explanation if any sought should be responded back in writing, through email or letter filed through registered post with acknowledgement due.  If adequate time is not provided to reply, then it is always suggested to write a letter on record seeking additional time while sending the available information and avoid having conversations over phone with the officers. Unnecessary visits to department may sometime act counterproductive.  Ensure the information called for is duly provided to the department and ensure proper acknowledgement for having submitted the documents is available on record. The reconciliation issue between the income tax returns and service tax returns, should be duly reconciled with proper reasoning, along with proper notification reference no, should be filed with the department with proper acknowledgement. The reasons for difference as highlighted supra may be explained in the letter.  
  3. Summons: When one is co-operating and providing information, summons are normally not issued. However, if the revenue is in motive to expedite the recovery (due to time bar or other reasons) then it is suggested to write to the concerned officer stating that all information sought has been duly provided.

If summons to be attended, Assessee should send the detailed explanation in advance on record and then attend ensuring that the statement if any is asked for or note prepared immediately on what was asked and what is submitted as well what was asked but not recorded. [This exercise is relevant when at times the facts favourable would be omitted and can lead to statement being evidence used against the assessee.]

  1. Issue of Show Cause Notice: Once a SCN is issued , then proper grounds of defense would need to  take as under: 

Possible Grounds of Defence

CBIC has now looked into the differences between ST-3 and IT returns after reconciliation. Show cause notices are being issued with draft notices marked with the following wordings –

  1. As per third party information, income declared as receipts in the IT returns appears to be towards activities that are covered within the ambit of term “services”.
  2. Receipts accounted as income in the balance sheet and IT returns is nothing but consideration for services rendered.

The notice seeks explanation for discrepancy and reconciliation. However, what is relevant to be answered and addressed is whether recovery can be sought for activities that in terms of the third-party information or rather data collected from CBDT that appears to be “services” to the authorities is discussed further.

Recovery based on nomenclature of return - On perusing the draft notices it appears that none of the activities are described in detail but are merely based on the nomenclature of service/receipt used in the IT return to assume that the same amount to service Eg. Professional income reflected in IT returns classified as income earned as intermediary. Whereas it is a settled position of law that income reflected in the IT returns/Balance sheet is not a proper basis to determine the service tax liability without establishing the nature of service and the purpose for which the income is received. Supreme Court in Faquir Chand Gulati vs. Uppal Agencies Pvt Ltd 2008 (12) S.T.R 401 (S.C) has settled the law that nomenclature of an instrument or document cannot be determinative of the nature or character of activity. Therefore, under such circumstances, the SCN fails to discharge the burden of proof as to taxability of activity.

This may be relevant for reconciliation specific to re-imbursement of expenses as pure agent which is per-se not liable to service tax but is separately accounted in income and expense. Thus, the condition for pure-agent needs to be construed liberally to advance the benefit of pure-agent and mere nomenclature in accounts cannot determine the levy of tax. 

No recovery on presumption - Part I of the Article has analysed various reasons for differences in turnover between ST-3 and ITR (26AS) concerning which recovery is sought under Service tax merely on an assumption that the activity appears to be “service”. In this regard Hon’ble CESTAT in Kush Constructions Vs. CGST NACIN 2019 (24) GSTL 606 (Tri – All) held that Revenue cannot raise the demand on the basis of such difference without examining the reasons and without establishing that the entire/ part amount received by the appellant as reflected in said returns in the Form 26AS is consideration for taxable services provided. They should not presume that the difference was because of any exemption or abatement, since it is not legal to presume that the entire differential amount was on account of consideration for providing taxable services.

Recovery on unidentified service - Notices seeking recovery in usual course are issued in a draft format with changes only related to assessee’s information and with nothing more emphasised on the nature of activity to be classifiable under a particular head of “service” to be made taxable. Hon’ble CESTAT, Delhi in Deltax Enterprises vs. CCE, Delhi 2018 (10) GSTL 392 (Tri – Del) had elaborated that no service tax liability can be fastened on an unidentified service. There is no provision for such summary assumption under the Finance Act, 1994. Thus, Assessment cannot be extended solely on the income tax return without identifying the specific taxable service.

When revenue cannot point out excess receipt or taxable service that results in consideration escaping tax, in absence of specific allegation with reference to the nature of service or the service recipient it is not tenable to hold an income even if it is admitted to be an actual income, as consideration for a taxable service. The minimum requirement to tax an assessee for service tax is to identify the nature of their taxable service along with the recipient of such service. Therefore, without discharging such onus, no recovery of tax could sustain. Thus, unless the activity is described in detail and examined in terms of section 65B(44) of Finance Act i.e. satisfying all the attributes of the term “service”, no demand or recovery can be made on a mere presumption, ignoring the exemptions and abatements.

No recovery based on IT return - Plethora of judicial pronouncements have settled the law that no demand of service tax can be confirmed on the basis of amounts shown as receivables in the Income Tax Returns. [In J.I Jesudasan vs. CCE 2015 (38) S.T.R 1099 (Tri.Chennai); Alpha Management Consultant P. Ltd vs. CST 2006 (6) STR 181 (Tri.Bang); Tempest Advertising (P) Ltd. v. CCE 2007 (5) STR 312 (Tri.-Bang.); Turret Industrial Security vs. CCE 2008 (9) S.T.R. 564 (Tri-Kolkata). This is for the reason as explained in part I.

Demand invoking extended period of limitation - In the present day context, CBIC has started issuing notices proposing recovery for the period 2014-15, 2015-16 invoking extended period of limitation u/s 73(1) of the Finance Act alleging suppression on the part of Assessee. Since the demand is primarily based on IT returns and form 26AS, the information of provision of service is well within the knowledge of the Department. As IT returns and information therein forms part of the government records, alleging suppression is not proper. If Assessee is already subject to audit (service tax or scrutiny of accounts) and facts are already in the knowledge of the parties, notice invoking extended period cannot be issued and no demand can be confirmed as held by Supreme Court in Anand Nishikawa Company Ltd. vs. Commissioner of Central Excise’ -  2005 (9) TMI 331 wherein held that where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.  When facts were known to both the parties, the omission by one to do what he might have done not that he must have done would not render it suppression.

On similar note, SC has in plethora of decisions viz. Nizam Sugar Factory Vs. Collector of Central Excise, A.P., reported in 2006 (197) E.L.T. 465 and Caprihans India Ltd. Vs. Commissioner of Central Excise, Surat, reported in 2015 (324) E.L.T. 8 held that when books already subject to audit, extended period cannot be invoked on alleged suppression. Therefore, demand if any sustainable should have been proposed within the normal period of limitation and placing reliance on the IT return at this juncture is nothing but an afterthought for seeking undue recovery [ not having authority of law- Art-265].

Course of Action – The proper course of action on receipt of a notice (not a show cause notice) is to understand whether issue raised can be resolved by facilitating reconciliation with supporting documents. The failure may result in issuance of a SCN on baseless grounds without application of mind.

  1. When discrepancy relates to method of revenue recognition or method of accounting as per required statutory guidelines, it is suggested to present the facts in a transparent manner from the stage of intimation letter/enquiry notice to support future litigation.
  2. When discrepancy pertains to difference in classification of service or receipt (Eg. Service income, salary income or advance), it is suggested to logically understand the provision of service or type of advance received and determine the taxability therein with disclosure of relevant facts and submissions on record.
  3. For any SCN proposing demand based on income reflected in books which is neither reported in ITR nor in ST-3 (but places reliance on ITR) should be objected, withdrawn and reissued.
  4. In case of de-centralised registration, authority cannot issue notice seeking details/reconciliation from assessee having STC code pertaining to different jurisdiction, if so; objection should be raised based on established facts. 

Therefore, when both CBIC and CBDT are designated and dedicated bodies of Government for levying taxes, any failure or delay in inter-departmental correspondence should not prejudice the case of Assessee or result in undue recovery without proper reasoning or foundation. Thus, notices issued for recovering taxes along with interest and penalties for failure to obtain registration, failure to pay taxes, failure to disclose the same in ST-3 returns etc. without analysing the provision of service, exemption, and reason for differences etc. could be challenged.

It needs to be noted that this trend could continue even under GST law. It is advisable to keep the reconciliation ready between the income as disclosed under income tax return and under GSTR-9. In case of enquiry/ audit this statement along with reasoning for difference and documentations would avoid future hassles. Feedback on this article may be mailed to [email protected], [email protected], [email protected]