Ker HC | If A Particular Income Is Not Taxable Under Income Tax Act, Cannot be Taxed On Basis Of Estoppel Or Any Other Equitable Doctrine


Kerala High Court: Vinod Chandran J., while answering the law points in favour of the Revenue department, restrained from any recovery of the amounts refunded, “(…)since as of now the levy of service tax on the payment in lieu of foreign agency commission will not be leviable as ‘Business Auxiliary service’ prior to 18-04-2006”


The appellant is a processor and exporter of seafood. The controversy herein is with respect to the refund of service tax paid by the appellant for services rendered prior to 18-04-2006 when service tax on foreign agency commission was not leviable. The appellant had paid tax without any reluctance or objection. Later, the High Court of Bombay in Indian National Ship Owners Association v. Union of India2009 (13) STR 235 (Bom) held that service recipient in India is liable to service tax for payments in lieu of service received from abroad only from 18-04-2006 after Section 66A was incorporated in the Finance Act, 1994. The Supreme Court upheld the judgment of the High Court of Bombay on 14-12-2009, within eight months of which application for refund was filed by the appellant before the original authority. The original authority allowed the claim against which a review was filed, which was rejected. Later, in the first appeal, the refund order was set aside against which the aggrieved party approached CESTAT, which finally ended concurring with the decision of setting aside the order of directing refund.


(a) Whether the Appellate Tribunal was right in setting aside the order passed by the Deputy Commissioner in refunding the amount collected illegally by the department?

(b) When service tax on foreign agency commission came into force only on 18-04-2006 by the introduction of Section 66A in the Finance Act, 1994, whether the Tribunal erred in setting aside the order of refund on the ground of limitation in submitting the application for refund?

(c) When the amount collected by the department does not have the colour of legality, whether Section 11B of the Central Excise Act, 1944 is attracted so as to refuse the claim of refund made by the assessee?

(d) Whether the impugned order is against the mandate of Article 265 of the Constitution of India?


Counsel for the Appellant, placed reliance on the decision of the present Court in CE Appeal no. 14 of 2018, decided on 03-09-2018, VP Khader v. The Commissioner for Central Excise, Service Tax and Customsso to submit that the payments were made by mistake in law and hence the same has to be refunded even if the application is not filed within the time provided.

Standing Counsel, Sri Ramavarma Reghunathan Thamburan for Central Board of Excise and customs relied on the decision of Supreme Court in Mafatlal Industries LtdvUnion of India, (1997) 5 SCC 536 and a decision of this Court reported in Southern Surface Finishers v. Assistant Commissioner of Central Excise, 2019 KHC 47.


The present Court considered the Supreme Court decision in Southern Surface Finishers, wherein it was found that, “(…) the mistake if committed by the assessee, whether it be on law or facts; the remedy would be only under the statute.” The Court elaborating upon the same view, said, “If that be so, the questions of law have to be answered in favour of the Revenue and against the assessee. But, however, we notice that the amounts have been refunded to the assessee as per the order of the original authority. In such circumstances, the Revenue would have to recover the amounts from the assessee, in which event we would be directing recovery of an amount which cannot be treated as tax due under Article 265 of the Constitution of India.”

Further, the Court took notice of the decision in CIT, Madras v. P Firm MuarAIR 1965 SC 1216, wherein it was held, “If a particular income is not taxable under the Income Tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a particular income is either exigible to tax under the taxing statute or it is not. If it is not, the Income-tax Officer has no power to impose tax on the said income”.


Disposing of the present appeal, the Court said, “In such circumstances, though we answer the question of law in favour of the Revenue, we find the Revenue to be incapable of recovery of the amounts refunded as tax due.” [Uniroyal Marine Exports v. CCE, CE Appeal No. 16 of 2019, decided on 17-11-2020]

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