In a landmark judgment, the Orissa High Court has reaffirmed that individual legal practitioners are exempt from the levy of service tax and GST for legal services provided under specific conditions. This decision came in the case of Shivananda Ray vs Principal Commissioner, CGST and Central Excise, where the Court quashed a tax demand raised against a practicing advocate based in Bhubaneswar.
Background of the Case
The petitioner, an individual legal professional, received a service tax demand notice on April 15, 2021, for ₹2,14,600 related to the financial year 2015–16. A subsequent recovery notice dated January 28, 2025, also included interest and penalties. The advocate challenged these notices, arguing that legal services rendered by an individual practitioner were exempt under the provisions of the Finance Act, 1994.
Department’s Stand and Court’s Observations
The tax authorities claimed the demand was issued due to the petitioner’s alleged non-compliance with certain statutory provisions. They noted that the adjudication was completed ex-parte as the petitioner had not responded to departmental communications. However, the High Court observed that the service tax liability was primarily based on third-party disclosures sourced from the Income Tax Department.
Importantly, the Court referred to its previous ruling in WP(C) No. 27727 of 2020, which clarified that legal services offered by individual advocates or law firms to non-business entities, or to business entities with a turnover below ₹10 lakhs, are categorically exempt from service tax.
Existing Guidelines and Department Instructions
The Court also highlighted that the Central GST authorities had already issued internal instructions in April 2021. These guidelines advised field officers to verify third-party information diligently before issuing tax demands, especially when dealing with professionals like advocates. Officers were further cautioned against initiating multiple or uncoordinated proceedings that could cause unnecessary hardship to individuals.
Court’s Final Verdict
Since the Department did not dispute the petitioner’s status as an independent legal practitioner, the Court concluded that the tax demand was invalid. The income on which service tax was levied was generated from exempt legal services. As a result, both the demand and recovery notices were set aside.
However, the Court made it clear that while legal service income may be exempt, any other income—such as from house property—declared in income tax returns for assessment years 2018–19 and 2020–21 may still be subject to scrutiny under applicable tax laws.
Conclusion
This ruling reinforces the legal protections available to practicing advocates under Indian tax laws. It serves as a strong reminder to tax authorities to exercise caution and follow due process before initiating tax demands, especially when exemptions clearly apply.