Reasonable cause under service tax law saved penalties where bona fide belief, rural operations, and prompt tax payment were shown.

Penalty under Sections 76, 77 and 78 of the Finance Act, 1994 was not sustained where the assessee showed reasonable cause for non-compliance. The lower appellate authority accepted a bona fide belief that small scale exemption was available, noted that the unit operated in a rural setting serving mainly poor students, and took into account immediate payment of service tax and interest on receipt of the show-cause notice. As these findings were not shown to be infirm or unsupported, Section 80 protection applied and the penalties were not restored.

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Issues: Whether penalties imposed under Sections 76, 77 and 78 of the Finance Act, 1994 were liable to be sustained, or whether Section 80 of the Finance Act, 1994 protected the assessee on the ground of reasonable cause.

Analysis: The lower appellate authority had set aside the penalties after accepting that the assessee entertained a bona fide belief that small scale exemption was available, that the unit operated in a rural setting and catered mainly to poor students, and that the entire service tax and interest were paid immediately on receipt of the show-cause notice. These findings were not shown to be infirm or unsupported by the department.

Conclusion: The penalties were not restored and the appeal was rejected.

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