Demand based on an unstayed circular set aside by the High Court could not be sustained.

A demand and associated penalties based solely on a Board circular treating the activity as business auxiliary service could not survive after that circular had been set aside by the High Court and remained unstayed. With no material showing any stay or reversal by the Supreme Court, the foundation for the show cause notice failed, and the Commissioner's order dropping the proceedings was found to be free from infirmity. The department's challenge was rejected, and the order in favour of the assessee was left undisturbed.

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Issues: Whether the demand and penalties could be sustained when the show cause notice was founded on a Board circular that had been set aside by the High Court and had not been stayed.

Analysis: The proceedings were initiated solely on the basis of the Board circular treating the activity as business auxiliary service. That circular had already been set aside by the High Court, and there was no material to show any stay or reversal of that decision by the Supreme Court. In such circumstances, the foundation for the show cause notice no longer survived, and the Commissioner's order dropping the proceedings suffered from no infirmity.

Conclusion: The demand and penalties could not be sustained; the view taken in favour of the assessee was upheld.

Final Conclusion: The department's challenge failed, and the order dropping the proceedings remained undisturbed.

Ratio Decidendi: A demand founded exclusively on a circular that has been judicially set aside and remains unstayed cannot be sustained.

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