In a significant ruling reaffirming the exemption granted to practising advocates under the Finance Act, 1994, the Orissa High Court has quashed a service tax demand and recovery notice issued to a Bhubaneswar-based advocate, Shivananda Ray. The Division Bench comprising Chief Justice Harish Tandon and Justice B.P. Routray held that the petitioner, being an individual practising lawyer, is exempt from service tax for legal services rendered in his professional capacity.
Background of the Case
The petitioner, Shivananda Ray, a practising advocate at Bhubaneswar, challenged a notice dated 15 April 2021 issued under Section 73 of the Finance Act, 1994, demanding service tax of ₹2,14,600 for the financial year 2015–16. This was followed by a recovery order dated 28 January 2025, demanding service tax along with a penalty of ₹2,34,600 and applicable interest.
Ray sought quashing of these notices on the ground that he is an individual legal practitioner and is thus exempt from service tax as per applicable legal provisions and judicial precedents.
Respondent’s Arguments
The Department, represented by its Senior Standing Counsel Mr. T.K. Satapathy, submitted that the show-cause notice was issued for contravention of Sections 67, 68, 69 and 70 of the Finance Act, 1994, read with the Finance Rules. It was further submitted that the petitioner did not cooperate with the adjudication process, which led to an ex parte order dated 9 August 2024 and the subsequent recovery action.
Court’s Analysis
The High Court referred to its earlier decision dated 31 March 2021 in W.P.(C) No. 27727 of 2020, where it had observed:
“The Court expressed its concern that practicing advocates should not have to face harassment on account of the Department issuing notices calling upon them to pay service tax/GST when they are exempted from doing so, and in the process also having to prove they are practicing advocates.”
Pursuant to that order, the Department had issued instructions dated 9 April 2021 and 15 April 2021 clarifying that legal services rendered by an advocate or a partnership firm of advocates to non-business entities or to business entities with turnover below ₹10 lakh are exempt from service tax.
The High Court reiterated those instructions and stressed the need for coordination among field formations to avoid repetitive notices and undue hardship. It noted:
“It is true that the Petitioner in the instant case is undisputedly a legal practitioner… Thus, in view of the admitted fact that the Petitioner is a practicing lawyer and the earlier directions issued by this Court… the Petitioner is exempted from levy of service tax for such income he derived from his legal service as a Lawyer.”
Final Order
The Court held that the service tax demand and recovery order related to the petitioner’s professional income as an individual lawyer were invalid and thus quashed both:
- The demand-cum-show cause notice dated 15 April 2021 (Annexure-3), and
- The recovery order dated 28 January 2025 (Annexure-5),
to the extent they pertain to legal professional income.
However, the Court clarified that income from house property, as disclosed by the petitioner in his income tax returns for Assessment Years 2018–19 and 2020–21, may still be examined by the Department for any applicable service tax liability, in accordance with law.
With the above directions, the writ petition was disposed of by the Orissa High Court, providing important reaffirmation of the exemption granted to practising advocates from service tax and instructing tax authorities to exercise caution and coordination in enforcement actions.
