Ultra vires service tax levy cannot sustain penalty for non-filing returns during the period when the levy was invalid.

Where the service tax levy for the relevant period had been struck down as ultra vires, the corollary obligation to file returns during that period was not operative. Non-filing of returns in those circumstances could not amount to a penal contravention under Section 70 of the Finance Act, 1994. The penalty was therefore unsustainable and was set aside, with consequential relief granted to the assessee.

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Issues: Whether penalty under Section 70 of the Finance Act, 1994 could be sustained for failure to file service tax returns for a period when the levy itself had been held ultra vires and the tax liability was later imposed retrospectively.

Analysis: For the relevant period, the service tax levy had been struck down by the Supreme Court. The liability to pay service tax, and the corresponding obligation to file returns, could not therefore be treated as operative contraventions during that period. In such circumstances, non-filing of returns could not attract penalty under Section 70.

Conclusion: The penalty was unsustainable and was set aside in favour of the assessee.

Final Conclusion: The appeals succeeded and the penalty orders were annulled with consequential relief.

Ratio Decidendi: When the underlying levy is held ultra vires for the relevant period, failure to comply with corollary return-filing obligations during that period cannot be visited with penalty.

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