Debatable taxability and bona fide belief can constitute reasonable cause, preventing penalty where tax and interest were paid.

Penalty was held not leviable where the assessee paid tax and interest after a bona fide belief that the amount was not taxable. Section 80 of the Finance Act, 1994 barred penalty because the taxability issue was debatable, and the later insertion of Explanation 3 to section 67, expressed as being for removal of doubts, supported the view that the position was not free from ambiguity. The assessee's prompt payment of tax and interest further established reasonable cause, so deletion of penalty was justified.

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Issues: Whether penalty was leviable when the assessee had paid tax and interest after a bona fide belief that the amount was not taxable, and whether section 80 barred imposition of penalty in the facts of the case.

Analysis: Section 80 of the Finance Act, 1994 provides that no penalty shall be imposed for failures covered by sections 76 or 77 if reasonable cause is shown. The dispute turned on the assessee's belief that amounts received before insertion of Explanation 3 to section 67 of the Finance Act, 1994 were not taxable. The issue was found to be debatable, and the later insertion of the explanation with the words "for removal of doubts" supported the view that the position was not free from ambiguity. On the facts, the assessee's payment of tax and interest also supported the existence of reasonable cause.

Conclusion: Penalty was not imposable and the deletion of penalty was justified.

Final Conclusion: The appeal was dismissed and the assessee's relief against penalty was sustained.

Ratio Decidendi: Where the taxability issue is debatable and the assessee shows bona fide belief amounting to reasonable cause, section 80 of the Finance Act, 1994 prevents imposition of penalty.

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