Reasonable cause and bona fide belief barred penalty under the Finance Act where tax and interest were already paid.

Penalty under Section 78 of the Finance Act, 1994 was held unsustainable where the assessee had a reasonable cause and bona fide belief that the activity was not taxable in the manner alleged. The arrangement with the recipient institution, which supplied water, electricity, kitchen equipment, utensils, furniture and fuel, and the then-existing Tribunal view supported that belief. As the assessee had already paid service tax and interest, and the dispute remained confined to penalty, Section 80 operated to protect the assessee from penalty under Section 78. The penalty was therefore set aside.

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Issues: Whether penalty under Section 78 of the Finance Act, 1994 was sustainable in view of Section 80 of the Finance Act, 1994 on the ground of reasonable cause and bona fide belief.

Analysis: The assessee was engaged in preparing and serving food under an arrangement where the recipient institution provided water, electricity, kitchen equipment, utensils, furniture and fuel. The arrangement and the then-existing Tribunal view supported the assessee's position that the activity was not taxably exigible in the manner alleged, and this furnished a reasonable basis for the assessee's bona fide belief. Section 80 protected an assessee from penalties under Section 78 where reasonable cause for the failure was shown. As the assessee had paid the service tax and interest and the dispute was confined to penalty, the statutory threshold for penalty waiver was met.

Conclusion: Penalty under Section 78 was not leviable and was set aside in favour of the assessee.

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