Reasonable cause under service tax law can bar penalty when tax and interest are paid before the show cause notice.

Penalty under Sections 76, 77 and 78 of the Finance Act, 1994 is not leviable where the service tax and interest were paid before issuance of the show cause notice and the assessee shows reasonable cause for the lapse under Section 80. The text states that the default occurred in the initial period after outdoor catering service entered the service tax net, which was treated as reasonable cause. The tax demand with interest remained payable, but the penalty component was set aside.

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Issues: Whether penalty under Sections 76, 77 and 78 of the Finance Act, 1994 was leviable when the service tax and interest had been paid before issuance of the show cause notice and the dispute related to the initial period after the levy of outdoor catering service.

Analysis: The demand of service tax with interest was not contested and had already been discharged before the show cause notice. The dispute survived only on the question of penalty. Section 80 of the Finance Act, 1994 provided that no penalty was to be imposed under Sections 76, 77 or 78 if the assessee established reasonable cause for the failure. As the liability arose in the initial period when outdoor catering service had newly come within the service tax net, the respondents were held to have shown reasonable cause for the lapse.

Conclusion: Penalty was not leviable on the respondents under Sections 76, 77 and 78 of the Finance Act, 1994.

Final Conclusion: The tax demand with interest stood restored, but the penalty component was set aside in view of Section 80 of the Finance Act, 1994.

Ratio Decidendi: Where tax and interest are paid before the show cause notice and the default occurs in the initial period of levy, Section 80 of the Finance Act, 1994 bars penalty if reasonable cause is established.

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