Reasonable cause waived Section 78 penalty where service tax lapse arose during management of a sick industrial unit.

Penalty under Section 78 of the Finance Act, 1994 was found unwarranted where the service tax default arose while the assessee was managing a sick industrial unit taken on lease and operating under difficult circumstances. The lapse was treated as unintentional rather than a conscious or contumacious breach, and the failed revival efforts followed by surrender of the unit supported a finding of reasonable cause. On that basis, Section 80 was applied to waive the penalty and the Section 78 penalty was set aside.

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Issues: Whether penalty under Section 78 of the Finance Act, 1994 was sustainable in the facts of the case and whether the benefit of Section 80 of the Finance Act, 1994 was available to waive the penalty.

Analysis: The default occurred during the period when the appellant was managing a sick industrial unit taken on lease. The unit was being operated in difficult circumstances and was later surrendered after efforts to revive it failed. On these facts, the lapse in service tax compliance was treated as unintentional and not as a conscious or contumacious breach. The circumstances constituted reasonable cause for non-imposition of penalty.

Conclusion: Penalty under Section 78 was not warranted and was set aside by invoking Section 80.

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