Retrospective tax validation cannot sustain penalties when non-payment was lawful under the then prevailing Supreme Court ruling.

Penalties for delayed service tax payment were held unsustainable where non-payment occurred while the assessee was protected by the then prevailing Supreme Court ruling in Laghu Udyog Bharati and tax liability arose only after retrospective validation. The later payment of tax with interest did not, by itself, justify penal action under Sections 76 and 77 of the Finance Act, 1994. The explanation to Section 117 of the Finance Act, 2000 was treated as protecting acts or omissions that were not punishable before the validation regime, so the deletion of penalties was upheld and the Revenue's challenge failed.

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Issues: Whether penalties under Sections 76 and 77 of the Finance Act, 1994 were leviable when service tax was not paid at the relevant time because of the then prevailing Supreme Court decision and was paid later with interest after retrospective validation.

Analysis: The liability to tax arose only after the retrospective validation provisions came into force. Before such validation, the assessee was acting under the protection of the Supreme Court ruling in Laghu Udyog Bharati, and the subsequent payment of tax with interest did not by itself justify penal action. The explanation to Section 117 of the Finance Act, 2000 protected acts or omissions that were not punishable before that section came into force, and the earlier setting aside of penalty was consistent with that legal position.

Conclusion: The penalties under Sections 76 and 77 were not sustainable and the assessee was not liable to penal action.

Final Conclusion: The Revenue's challenge failed, and the order deleting the penalties was upheld.

Ratio Decidendi: Where tax liability is fastened only by retrospective validation after the assessee's non-payment was consistent with the law as then declared, penalty cannot be sustained in the absence of a punishable default under the pre-validation regime.

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